National Bank of Greece ADR (fka NBGGY)

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Greek equity investors should take heed of rallying debt market:

When debt markets and equity markets are telling different stories, it can be highly profitable to pay attention.

A pronounced example of this can be seen in Greece, where the performance of its equity market is sharply lagging behind Greek government bonds that have rallied on signs that it is finally emerging from its economic slump. If the debt markets are correct, then Greek stocks should be due a re-rating next year.

The most recent IHS Markit Greece PMI showed its sixth consecutive improvement in manufacturing conditions, while employment growth was at its highest level in the 18 years that the survey has been carried out.

The good news has been reflected in Greek 10-year government bond yields, which have fallen from more than 7 per cent at the start of the year to 4.3 per cent.

The Athens Composite stock index is up a comparatively measly 16 per cent this year, back to the level at which it was trading in 2015.

There are some technical factors behind Greece’s stock market trailing in this way. Many Greek stocks are tiny in terms of market capitalization following the crisis, meaning that few bank analysts bother to cover them and large funds are unable to own them.

Psychologically, many professional investors remain traumatized from prior experiences investing in Greece and are not yet willing to take the career risk of distancing themselves from the safety of the herd.

Few are also likely to bother to look beyond the headline multiples of an index that is distorted by the heavy weighting of financial companies.


But for more nimble stock pickers, there are opportunities. A number of Greek industrial stocks have strong balance sheets and trade at undemanding multiples of free cash flow.

Those looking for a racier, although far riskier, option can look to Greek bank shares.

Not only is banking the most economically sensitive sector, but these lenders have very high capital ratios, trade at large discounts to book value, and operate in a highly consolidated retail banking market which in future should become profitable.

Either way, if the wider market catches on, betting on Greece could end up looking less contrarian and more consensus by the end of 2018.

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