Sep 28th, 2015, Greek stocks might be cheap… under certain conditions

 

·         Greece’s Prime has been visiting US; he is going to speak to UN assembly on October 1^st. In addition, he is going to speak with counterparts from Cyprus, Brazil, Egypt, Palestine and Turkey, on the side lines of the UN assembly.  

·         Tsipras attended the Clinton Global Initiative Annual Meeting 2015, where he was interviewed by the former US President Bill Clinton. During this interview, he emphasized his willingness to attract FDIs, but also stressed out the need of debt restructuring. 

·         According to local newspaper Kathimerini, Washington advised Greek government during its negotiation with creditors. It appears that the US government showed a strong interest in keeping Greece within Eurozone and provided advice to Tsipras on how he would deal with negotiation.

·         According the Hellenic Federation of Enterprises (SEV), Greece needs to halt disinvestment which continued in 2014. More specifically, although the total amount of investments reached the level of 18 bios, this was surpassed by annual depreciation which was 33 bios euros. This means that it needs 15bios euros of additional investments on annual basis, in order to maintain its current level of prosperity.

·         It appears that the number of Greek companies, which generated revenues above 20 mios euros decreased during crisis (from 1020 in 2012 down to 872 in 2014). However, the total amount generated by those companies increased as a % of GDP (from 53% in 2010 up to 58% in 2014). If we add the increase of Greek exports by approx. 30% during the same period, this means that concentration and competitiveness of local industry has been enhanced. 

·       Overall, there was an inflow of bank deposits in August, which amounted 300 mios euros. It seems that bank deposits' outflow continue as regards individuals and reached the level of 1 bios euros. However, this was surpassed by bank deposits inflows concerning corporate accounts which amounted 1.3 bios euros. 

·         According to Bradley Paul Martin who represented Eurobank’s main shareholder Fairfax Financial Holdings in the bank’s shareholders meeting, ‘Greece can make a comeback’. In the same meeting, Eurobank's CEO F.Karavias stated that 'after 11 month of political uncertainty and three consequent elections, local conditions are in favour of achieving a long term political stability. He also emphasized that Eurobank will manage effectively the results of forthcoming stress tests.    

Risk assessment. Greece gradually returns to European normality. However, the recent political stability has destroyed significant part of confidence, which is necessary to attract Foreign Direct Investments (FDIs).

The recapitalisation of Greek Banks appear to be the first milestone as regards local economy restart. Although it requires significant technical expertise to manage this process as it invlolves the attraction of foreign private sector funds, there are various elements which indicate that chances increase to achieve a successful recapitalisation, such as:

·         Despite persisting political uncertainty during the last 11 months, the impact on GDP was not significant. More specifically GDP grew by 0.4% in the 1^st quarter 2015 (vs. 1q’14) and by 1.4% in the 2^nd quarter 2015 (vs. 2q’14). Considering that historically the local economy performs well during summer due to tourism, the overall impact to stress tests’ base scenario won’t be significant.

·         The implementation of capital controls impacted significantly consumption in July. However, it also impacted imports which resulted to a significant improvement of current account. In addition, Aug’s private consumption recovered most of July’s loss.

·         Capital controls decreased the circulation of banknotes and increased the transactions with debit cards and/or e-banking; this brings to surface a part of local black economy which improves banks’ liquidity position.

·         There was an improvement as regards Aug’s state revenues (via Tax Offices), which reached the level of 2.8 bios euros. This is higher by 28% compared to Aug’14 revenues (2.19 bios euros). It is still unknown if this continues in September. In case, if this trend continues, it will prove that capital controls impact negatively local black economy.  This development will improve overall economic outlook and indirectly local banks' recapitalisation.

In general, the successful recapitalisation of Greek banks is considered as THE basic prerequisite for local economy’s restart.  It would be extremely difficult to achieve a positive outcome unless:

1.       the Greek government implements structural changes which are included in the 3^rd MoU.

2.       there will be a significant reduction of total expenditure related to pensions. This will a) facilitate the abolition of all hidden taxes, which significantly increase the burden on local enterprises and taxpayers and b) will prepare the ground of tax reduction in coming years.

3.       a Bad Bank is created, which will handle a significant portion of NPLs.

Needless to say, if the latter occurs, it won’t only protect existing private sector shareholders who invested in last year’s recapitalisation but will also send a positive message to international community that Greece re-emerges as a safe investment destination. Last but not least, if the above mentioned three conditions are met, then the evaluations of local stocks are significantly undervalued.