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Greek Equity Strategy – Post Greece’s IG upgrade | Stay on board

Stay on board – Greek stocks have had a rather muted summer (ASE +4.7% in July, -1.6% in August), as the prospect for higher-for-longer rates fanned worries about the global economy, leading to widening equity risk premia amidst poorer liquidity conditions given the low seasonality. With Greek stocks already up 35% ytd (banks +55%), the short-term risk-reward looks symmetrical as the fragile international sentiment is balanced with the strong domestic fundamentals, attractive valuations and positive catalysts. Given the positive domestic medium-term outlook, we advocate that investors selectively add exposure during international-induced corrections. Our preferred list of picks is a mixture of quality names with high earnings visibility and cash returns (OPAP, Jumbo, Mytilineos) further supplemented by higher-beta stocks at low valuation, namely PPC & Piraeus Bank.

Valuations remain compelling, both on an absolute and relative basis… – The ASE is up 13% since the first elections (21st May) but just 0.5% since the second election round (23rd June), as the crystallization of the political landscape was partly priced-in in the period between the two rounds. That said, we note that strengthening fundamentals and strongly positive earnings revisions (both for banks and non-financials) have kept valuations at very compelling levels. Indicatively our non-financials universe is still trading at 20% discount vs EU peers. As for banks, the lower-priced cohort, namely Alpha and Piraeus, remains at 0.5-0.6x P/TBV, thus indicating plenty of scope to narrow the gap vis-à-vis foreign peers as conviction in Greek banks’ ability to generate sustainable 2-digit RoTE increases. Greece currently enjoys best-in-class earnings momentum in Europe, offers a cheap source of cyclicality, compelling starting valuations, low positioning, a healthy macro outlook (only partly wrinkled by the effects of the recent floods, which will likely cost >1% of GDP), solid profit growth profile for listed entities and technical catalysts (sovereign rating upgrade). As such, we expect the local market to outperform in the next 12 months, barring any significant risk-off swing.

IG upgrade: a catalyst that has not run its course – The upgrade of Greece’s sovereign rating has been well-telegraphed as a key catalyst that will help attract investor flows, thus improving market liquidity and leading to a narrowing of risk premia. Although Greece has indeed been upgraded to IG by Scope, and last Friday by DBRS (with the latter being among the agencies considered by the ECB), it is the other mainstream agencies that investors mostly focus on (S&P, Fitch, Moody’s), and, as such, this catalyst is still ahead of us, with positioning thus poised to be supportive in the coming months. Although some market participants have cautioned that the re-rating theme ahead of the sovereign upgrade may have already run its course, we argue that there is plenty of room to go, given the >6% ERP embedded in the price of non-financials (c9% COE). Indicatively, a 1ppt reduction in COE would translate into a c13% upside, ceteris paribus. As for banks, given the higher COE incorporated in prices (e.g. >17% for Alpha and Piraeus), the upside from the compression of equity premia is more material. We expect stocks included in the MSCI Standard index to benefit the most from the resulting fall in COE.