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Greek Equity Strategy – Thoughts-on-the-go | Tug of War v2

The Russia-Ukraine conflict has changed the backdrop for Greek equities, as it has raised the equity risk premium, exacerbated inflationary forces, cast doubt about the macroeconomic recovery and shifted the narrative from reflation/reopening towards stagflation. The Greek market was quick in incorporating a spike in risk premia (ERP +140bps in the aftermath of Russia’s incursion) having lost c17% in the two weeks following the start of the war. Since the recent trough on 8th March, Greek equities have bounced back c9% as investors continue to assess the spillover from the tensions and recalibrate their portfolios.

Performance
The bout of risk aversion has affected mostly Greek banks, which have been hit the hardest (-17% since 23rd February) as the rotation into value started to unwind due to fears about stagflation risk. Among non-financials, Terna Energy is the only large cap name in the green (+18% over the period), with Jumbo, Quest, Sarantis and ELPE also featuring among the most resilient stocks (little changed). Relative to EU peers:
- The ASE has underperformed the Stoxx 600 by almost 8% since the onset of the crisis shedding c9%. That said, ytd it remains an outperformer (by c4% vs the Stoxx 600).
- Greek banks have also underperformed periphery banks by c8% since the conflict but, ytd, they are up 5% having outperformed EU banks by c10%.

Valuation
- On an absolute basis, non-financials’ valuation has retreated to c6.5x EV/EBITDA, small discount vs the long-term average. Greek banks’ valuation has also fallen to c0.5x P/TBV (from c0.6x prior to the war).
- On a relative basis, Greek non financials are trading at c25% EV/EBITDA discount vs their EU peers, a bit higher than the long-term average discount of c20%. Similarly, Greek banks’ relative P/BV discount has widened to >20% after narrowing to as low as 15% prior to the conflict.
- The Equity Risk Premium embedded in the current prices of Greek non financials has expanded to c6%, and although this does not look extremely compelling, this ought to be seen in the context of the increase in the attractiveness of Greek bonds (with the respective 10-year GGB yield now at 2.6% vs 1.2% in December).
- In that regard, the earnings yield offered by Greek non financials, near 8.5%, is quite attractive, especially as this is further enhanced by a c4% dividend yield.

Our view – Sell the rallies
Besides being a volatility-inducing event, the war in Ukraine has catalyzed a regime change given the spillover effect on raw material prices and supply chains. The market will thus continue to grapple with concerns about the impact of inflationary pressures on growth and worries about tail risks from a potential escalation of the conflict (e.g. disruption to gas flows into Europe), and as such, we do not believe that any pick-up in risk appetite can be sustained, barring a significant breakthrough in the negotiations. On that basis, from a tactical perspective we would see potential rallies as opportunity to take profits awaiting the dust to settle on the geopolitical front.

In our report we identify 3 scenarios, with our baseline predicated on deteriorating growth/inflation mix but assuming healthy GDP/corporate earnings growth and pointing to significant room for outperformance for OPAP, ATHEX, Mytilineos, Fourlis and the banks (NBG being our top pick). In this note we have moderated further our risk stance tilting our portfolio away from commodity exposure by removing PPC given the risk from a potential windfall tax on power generation (albeit keeping our Buy rating given the cheap valuation).