Greece – Developments to watch for now

There is now a new government in Greece, so how does second half of 2012 look like for Greek stocks?

The New Greek government
First of all it is indeed positive that a Greek government with a fairly wide coalition comprising more than just a few mandates more than 50%. This provides some comfort in the short term that this could actually work.

But before we jump there are some caveats. First of all, the new government needs to negotiate with the Troika. This is not a walk in the park! There are already quotes from Democratic Left that the three parties agree that no public jobs will get slashed. This is probably not the way to go if you need a deal with the Troika. But again this is politics, with a lot of fireworks to divert the opponent. The message is: The process to bridge with Europe will be incremental and the reactions in the market will reflect this.

What investors also should try to watch is the political opposition. I know that Greece has just had elections so it is a bit premature to talk of new elections again. But the task ahead is not a popular task, so if polls show a further (dramatic) shift in the support of Syriza and they use this to force the government's hand two things could happen. Maybe the coalition will just bite the bullet and keep the process going. (As Winston Churchill said “If you are in hell – keep going”) The worst thing for investors would be a quick surrender if the parties are not willing to risk the long term implications of being wiped out of the political chart.

It is not all about Greece
Greece is part of the overall European story but since the elections the focal point of European leaders has been Spain and the probably devastating consequences of the situation there. The more no-solution there is to the overall problems in Europe the more investors will seek to unload assets in Spain and Italy. Given such a probable ongoing process it would be hard to imagine a huge pick up of for example institutional interest in investing in Greece. Why sell risk in one place and buy a similar one in another?

Finally there is a risk of MSCI reclassifying Greece as an Emerging Market instead of a developed market. This will cut down the potential money pool from asset managers in the future. It is not final yet, but have this in mind. The road is bumpy looking into second half but that said, you might consider investing in Greece if the opportunities are there.

Greek underperformance by miles
When you look at performance the last three years, see chart 1, it is obvious that Athens stocks have had a rough time. Banks have crumbled, there has been a domestic recession and investors are concerned about nationalization and what currency will exist when you want your money out.

Investors are looking at index 30 for ASE and level of 125 on Stoxx600 over a period of just three years and this has left many investors scalded and not inclined to go back in. But just when the market or investor psychology is in the pits it is time for you to react. When investors rush out the main door, you should sneak in the backdoor. Sniff around and calculate, evaluate and decide. Maybe youwill  lose 100% of your money but you could get it back 2,3,5 or even 10 times, if this is the case then you might be willing to invest. As long as you know the score. 

I will be looking more into some Greek stocks soon to figure out if there are hidden gems.

Conclusion
It could be time to look at Greece once again but overall there are events which have to fall into place before it really gets interesting. The government has to produce results and an important one is getting a compromise with the Troika. Secondly the coalition must move forward as if there were no way back because - there isn't. This should make some Greek stocks perform, but for an all-clear the situation in Spain has to improve. There are definitely risks in these kind of investments but the rewards could be impressive - each individual investor will have to decide for himself or herself.