FOCUS: Greek Stocks Seen Outperforming As Default Fears Fade
By Nick Skrekas
Of DOW JONES NEWSWIRES
ATHENS (Dow Jones)--Greek stocks may be poised for a major rally this year as European Union leaders move to tackle the country's debt crisis and foreign investors return after shunning the Athens bourse for much of the past two years.
Since the start of 2011, the Athens Stock Exchange general index has already risen 16.8%, making it the best performing bourse among the world's developed markets. Average daily volume jumped to 91 million shares last week, well above that seen in the second half of 2010, when it was just 27 million.
Moreover, in January, foreign investors accounted for 48% of all turnover and increased their stake of bourse capitalization to 51.6% from 48.9% in December, according to ASE data.
"The game has changed. The ASE is no longer a 'no-go' zone and it is back on the screen of foreign institutional investors," said Theodoris Krintas, managing director of Attica Wealth Management. "Last year was a classic trough, where the ASE hit bottom, and now it is bouncing back like a spring released from pressure."
Credit Suisse upgraded the Greek market to 'benchmark' in late January, arguing that it is the cheapest of the 'peripheral' euro-zone countries. "It is the most attractively valued euro-area market... It also looks attractively valued on price-to-book and the forward price-to-earnings ratio relative to the Continental European market," said Credit Suisse strategist Andrew Garthwaite.
The key to any medium-term rerating of the Athens bourse will be, of course, whether EU leaders manage to produce a comprehensive solution to Greece's, and Europe's, debt crisis by the time of their March 24-25 summit.
In the eye of the storm last spring, when Greece was forced to negotiate a EUR110 billion bailout from the EU and the International Monetary Fund, Greek stocks were not an investible case for most foreign investors.
But now, signs that Europe is moving towards a solution has them taking a fresh look at the ASE. Most significant is a mooted EU plan to help Greece buy back outstanding public debt at a discount--a move that would reduce Greece's debt pile without the need for an outright debt restructuring, something which had scared investors.
The mooted bond buyback plan is positive for the sovereign and hence positive for the banks, while the banking system is unlikely to pose a systemic risk, and we change our overall view from negative to neutral on Greek banks, said Niall O'Connor, senior bank analyst at Credit Suisse.
As fears of restructuring recede, Greek bond yields have dropped sharply, by some 150 basis points since the start of the year, while Greek banking stocks have jumped.
With the general index currently hovering around 1670 points, it is still down 22% from its recent 52-week highs, which hints at more upside potential.
Predictions of hefty bond-spread compression on the back of the EU plan, given the Greek sovereign's higher beta, is expected to flow through to higher valuations.
"Every 1% fall in Greek 10-year bond yields in my opinion leads to a 150 general index point rise for the ASE. I also expect a 50% increase in average daily turnover in the first half of the year to about EUR150 million," said Krintas.
That means if the Greek 10-year yield drops from its current 9.65% to sustainable borrowing levels of 6%, the bourse should rise 33.2% and reach about 2200 general index point from the current level of 1650.
The banking sector makes up 40% of ASE capitalization and the threat of default, prolonged recession and a liquidity squeeze have kept valuations at about 0.6 times price-to-book-value.
"If default risk disappears, than Greek banks should rerate to one or 0.9 times P/BV," Krintas said. Senior banking-sector analysts calculate that would mean a 30% jump in the ASE general index by the beginning of 2012.
Currently the banking sub-index is still 29.2% below its 52-week highs. But analysts caution it could be a bumpy ride up if there are more large rights issues draining liquidity.
"For these positive scenarios to bear fruit, the EU bailout mechanism must be able to intervene and take real action. We need detailed announcements from the 27-member bloc in March," said George Goufas, head of institutional trading at National Securities.
