8th Oct 2015, Greek stock prices might be heavily undervalued

·         as it was expected Greece’s government won last night's vote of confidence; 155 MPs voted ‘Yes’ and 144 voted ‘No’ (there was an absent MP, who stated that he would vote .

·         France's Hollande stated during his speech at European Parliament that Europe will agree on debt restructuring with Greece, if the latter meets its obligations. It is important to mention that this statement occurred just before the vote of confidence at Greece's Commons and while having Chancellor Merkel sitting next to him. 

·         Ministry of Economy’s Stathakis stated that GDP contraction could be less than -1.5% due to spectacular performance of tourism and less than expected impact of capital controls to local economy. He added that approx. 4.5 bios euros of EU funds will be released by end of 2015.

·         Ministry of Finance’s Alexiadis stated that a new real estate tax will be introduced especially to those Greek citizen who own real estate abroad. He mentioned that Greece will replicate Italy’s similar tax. He added that effective 2016, all real estate transactions will be processed automatically through the so-called system TAXIS. 

·         Ministry of Pensions’ Katrougalos stated that SYRIZA’s government will try to protect all pensions below 1000 euros. At the moment there about 900,000 pensioners who earn more than 1000 euros on a monthly basis. Press linkages show that pensions above 1,000 euros will be reduced between -11% up to -13% (in weighted average terms)

·         Greece’s 10 yr. bonds' yield dropped below 8% (at 7.774%) for the first time since November 2014. This was fluctuating close to 20% in 10^th of July 2015. On the other hand, yield of German Bund was fluctuating around 0.6% while Italian at 1.69%, Spanish at 1.83% and Portuguese at 2.35%.

·         Greece’s 2 yr. bonds' yield dropped below 9% (at 8.932%) which represents one year low. As a reminder, the 2 yr.  bonds yield reached the level of 58% in 10^th of July 2015.

·         Local Bourse’s index and trading volume increased during the last few days. More specifically, total gains during last week crossed the level of 6% while banks’ index increased by 28.8% during the last four sessions.  In addition, trading volume increased to over 60 mios on Wednesday from just over 40 mios euros on Tuesday

·         There has been an escalation of geopolitical crisis in Syria. More specifically, Russia said it has launched rocket strikes on Islamic State group targets in Syria from warships in Caspian Sea – about 1,500 km (930 miles) away.

Risk assessment. I remain on my previous estimates that the current SYRIZA – Independent Greeks coalition won’t last long. In addition, Greece's GDP contraction will be less than it was initially expected after the implementation of capital controls.

This, among other things, means that Greek stocks' evaluations remain relatively cheap. Since my previous commentary in which I was stating that Greek Banks’ stocks might be cheap, prices increased by almost 30%. The positive thing is that trading volume is gradually catching up as well but still remain low compared to pre-crisis levels.

It appears that the SYRIZA-led government will proceed on implementation of austerity measures. Although the Greek government will have to implement pension cuts and structural reforms, with a marginal majority of 5 MPs, the country’s risk profile has been improved significantly since July because of a) Tsipras’ fresh mandate and b) the vast majority of opposition remains pro-Europe. This is evident mainly on yields of Greek bonds.

Tsipras' determination to complete the evaluation of current program within the agreed timeframe, has nothing to do with the urgency for disbursement of 2 bios euros. This is mainly due to the fact that completion of evaluation will send the positive message to markets, could attract investments. The resulting improvement as regards overall economic environment, will allow him to proceed on Greek Banks’ recapitalisation. And if everything goes well, he could close the deal as regards the Greek debt's restructuring.

You may ask, ‘how can a leftish politician be so sensitive about markets and banks?’ Although Tsipras is very keen to use populistic language to attack markets and banks, it seems that he understands that a failure on recapitalisation front could result to Banks’ bail-in. A potential bail-in won’t only impact bondholders, and depositors but will cause derailment as regards local economy’s recovery and more importantly could cause social unrest.   

In addition, Tsipras has shown evidence in the past that is very cautious as regards developments in banking sector. More specifically, during the recapitalisation of Greek Banks in 2014, which occurred just after his victory in European Parliament, he kept low profile but started pushing for snap just after the completion of recapitalisation (October '14). 

Probabilities of having a positive scenario are high. In addition, what is beyond dispute is that many stocks in Greece are at this point incredibly cheap by almost any measure.

Although trading volume in local Bourse is tiny, it gradually increases. In addition, Banks’ stock prices have been increased by almost 30% since last week of September. Due to capital controls, all purchases of Greek stocks represent foreign funds. If Greece’s government keep its promises and meet its obligations, Athens Stock Exchange could act as the mean for foreign capital inflow to Greek economy.

Few things are as little understood as investing, and rarely are they as misunderstood as when they are most interesting and useful. For all reasons explained above, current prices of Greek stocks represent a typical example of heavily undervalued assets.