I have been posting for a while now that I think Greece provides the greatest upside potential. Greece’s sovereign bonds outperforming was one of my ten surprises for 2013 three months ago. And with bond yields now falling below 10%, Morgan Stanley is getting onboard so I am not the only one recommending this trade. I would also posit here that Greek equities have been well beaten down and trade at low multiples based on low earnings, meaning that if recovery does take hold in Greece as I expect it to, then you will get a double benefit from earnings growth and multiple expansion.
Here’s what Ekathimerini said about the Morgan Stanley view:
According to a Wall Street Journal report, Morgan Stanley’s financial forum last week heard the bank’s global head of sovereign strategy include Greek bonds among “the top fixed-income trades of the year.”
Paolo Batori explained this recommendation by reportedly saying that “we believe that Greece is going to be an improving macro story this year and next. Greek growth is going to regain strength this year and turn positive next year.”
I agree with this take and below are a number of articles telling you why:
- Sovereign bond distress decreasing rapidly. This is still a very risk-on trade. Greek bond yields below 10% signal increasing confidence (Ekathimerini): “With borrowing costs at the lowest level in more than 2 1/2 years, Greek bonds signal increasing confidence the country is stemming the financial turmoil that triggered the euro region’s sovereign-debt crisis. The yield on Greece’s bonds due in February 2023 closed below 10 percent on May 3 for the first time since October 2010 amid signs the nation has taken steps to tackle its fiscal deficit. The securities have rallied along with the debt of Spain, Italy and Ireland, as central banks in Europe, the U.S. and Japan have pursued accommodative monetary policies, fueling demand for Europe’s higher-yielding government debt. “The Greek move is a standalone move,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Hedge funds are getting involved after the stabilization and the slightly better-than-expected news on finances and privatizations in the last month. However, the market is highly illiquid and I don’t think it would take much to push it around.”
- Primary budget surplus: ‘Worst is over’ claims Greece ahead of IMF health check (Telegraph): “Mr Stournaras’s upbeat tone comes ahead of the IMF’s health check on the Greek economy, which is expected to indicate that the country is turning the corner. The IMF is expected to deliver its annual Article IV Consultation on the country tomorrow, which will give its verdict on whether the economic outlook is improving after six years of deep recession. The IMF has praised improvements to Greece’s much- maligned tax collection procedures, according to reports in the Greek media this weekend. Mr Stournaras said attempts to fix the country’s parlous public finances are starting to bear fruit, and could allow it to return to financial markets as early as next year. Athens is on course to deliver a primary budget surplus – which does not take into account debt payments – a year ahead of schedule.”
- Privatization to add revenue to fiscal situation: Revenue forecasts have dropped as it is a buyer’s market but I expect this to change. Greece’s privatization: New beginning or false dawn? (Ekathimerini): “The target for privatization revenues has since been revised downwards, first to 19 billion euros and then 11 billion euros by 2015. The pressure, however, has not decreased. The sale of the stake in OPAP to Emma Delta for a total of 712 million euros will give the Greek government some breathing space but the troika expects to see more sell-offs soon as more than 2 billion has to be raised this year. Much has been made of how Greece has dragged its feet, failing to kickstart the privatization process quickly enough. The country’s privatization agency (HRADF) has also been slammed for lacking organization, with one analyst recently labeling its efforts as “simply not up to par on any international standards.” The fund has also been blighted by several changes of leadership. The criticism of Greece’s efforts has been largely valid but this doesn’t mitigate the fact that it has been trying to sell in a buyer’s market.”
- PMI has bottomed: Contraction is still ongoing but I believe the bottom is in. Greek PMI reaches 21-month high as rate of decline in output slows (Ekathimerini): “The rate of decline in output at Greek factories eased to the slowest since June 2011 last month, according to the latest figures from Markit’s Purchasing Managers’ Index (PMI). The PMI index in April posted at a 21-month high of 45.0, up from 42.1 in March, according to date released on Thursday. Phil Smith, Economist at Markit and author of the Greece Manufacturing PMI warned that despite signs of the downturn in the manufacturing slowing, serious problems remained. “It must be noted that these latest figures still show generally marked rates of contraction, with the sector set to remain a drag on the wider economy in months to come, in part through the impact of more factory-based jobs being lost,” he said.
- Tourism: Apparently, the Germans are still wary but they will come back: Hotel rates in Greece drop to lowest level in recent years (Ekathimerini): “The only countries that are currently cheaper than Greece are Bulgaria (56 euros), Romania (66 euros) and Poland (73 euros), while the most expensive is Switzerland (206 euros). Turkey is in fact the fourth most expensive European destination, with an average online room price of 168 euros. In Athens hotel rates are showing a 12.5 percent decline year-on-year, as the average rate this months is 84 euros, against 96 euros in May 2012. The drop from May 2011 is even greater, at 26.3 percent from 114 euros. This ranks Athens as the seventh cheapest European metropolis in terms of hotel accommodation. Booking.com showed yesterday that Greece has the lowest online accommodation rates among its competitors, with prices starting from 6 euros per room, against 8 euros in Turkey and Spain, 9 euros in Bulgaria and 13 in Italy.”
In my view all of this adds up to a bullish Greece scenario.
This bet is not for the faint of heart because the situation in Greece is still tenuous and it could take a turn for the worst. However, increasingly indications are that the worst is over and that Greece has bottomed. I would expect the largest gains to be made now in both bonds and equities.