Produced by Filip Fortuna. Filmed by Petros Gioumpasis.
When debt markets and equity markets are telling completely different stories it can be highly profitable to pay attention. A pronounced example of this can currently be seen in Greece where its equity markets are sharply lagging Greek government bonds that have rallied during the country's recent emergence from an economic depression. If the debt markets are correct, then Greek stocks should be one of the better performing markets next year.
The most recent IHS Markit Greece PMI showed its sixth consecutive improvement in manufacturing conditions whilst employment growth was at its highest in the 18 years the survey has existed. This consistently good news can be seen in the, albeit illiquid, Greek 10-year government bond yield, which has fallen from over 7% at the start of the year to 4.3% today. The Athens composite stock index, meanwhile, is up just 16% year to date.
There are some technical factors behind Greece's stock market lagging behind the improvements seen in its government debt and economy. Many Greek stocks are tiny in terms of market capitalisation and illiquid following the crisis, meaning few analysts bother to cover them and large funds are unable to own them. Psychologically, professional investors remain traumatised from their prior experiences investing in Greece and may not yet be willing to take the career risk of distancing themselves from the herd. Few also are likely to bother to look beyond a headline price to earnings multiple of an index that is heavily distorted by its weighting of banks.
But for more nimble stock pickers, there are certainly opportunities. A number of Greek industrial stocks have strong balance sheets and trade at undermining multiples of free cash flow. Those looking for a racier, although fall riskier option, can choose Greek banks. Not only are they the most economically sensitive sector, but these lenders have very high capital ratios, trade at large discounts to book value, and operate in a highly consolidated retail banking market which in the future should become very profitable. Either way, betting on Greece may become one of the trendier trades in 2018.