Betting on Greece with ETFs

Benj Gallander and Ben Stadelmann
Tuesday November 24, 2015

Another white-knuckle negotiation that went well into overtime. Another tightrope walk of pragmatism between hard-nosed lenders and an austerity weary populace. Then finally a grudging compromise that releases another chunk of financial aid. Intense, but for the Greek government, it’s just another day at the office.

Though Greece’s debt problems appear to have the characteristics of a perpetual motion machine, there is a different flavour to the current strife. Alexis Tsipras continues to occupy the Prime Minister’s office, his left-wing Syriza party being the surprise winner in last September’s election. Ironically, they ran on a platform of implementing the very reforms they had so vigorously opposed in negotiations with the European Union, International Monetary Fund and European Central Bank. You might say that Mr. Tsipras turned his back and jumped to the other side of the barricades.

This is reminiscent of the turbulent situation in Ontario in 1991, when Bob Rae’s NDP collided with labour unions over wage freezes and unpaid vacation in the wake of a recession that sent the province’s finances into a tailspin. Back then, it was US rating agencies that held Mr. Rae’s feet to the fire. The politics of debt cuts a broad swath through idealism.

The bear market in Greek stocks — the composite index is down 87 percent over the past seven years — has attracted the attention of noted value investors. A group led by American billionaire Wilbur Ross pumped €1.3 billion ($1.9 billion) into Eurobank Ergasias last year and Prem Watsa’s Fairfax Financial Holdings Ltd. took major positions in Greek financials, real estate and industry. So far, these investments have done poorly.

The series of bailouts from 2010 to 2014 were unable to lift the Greek economy into a sustained recovery, but the economic collapse last summer was of a different order. Suddenly the threat of an exit from the euro zone and a return to the drachma was a very real possibility.

The resolution of that crisis, as difficult and humiliating as it is for the people of Greece, has created conditions where the structural changes to the economy and society demanded by lenders have a realistic chance to be implemented. Protests will continue, such as the general strike last week, but with no credible alternative, a measure of political stability is achievable.

That’s the macro call behind the recent purchase of the Global X FTSE Greece 20 ETF (GREK-NYSE) for our Vice-President’s Portfolio at $9.31 (US). The ETF tracks the largest companies on the Athens Stock Exchange; its top 10 components make up roughly 73 percent of the fund.

Greek banks are in an awful mess, but some of the large non-financial firms look surprisingly robust. The largest is Coca-Cola HBC AG, with a huge weighting of 21.8 percent. This enterprise is one of the world’s largest Coke bottlers in sales volume; only 5 percent of that is consumed domestically. Hellenic Telecommunications Organization SA comprises 12.4 percent of the ETF and it is profitable, earning €267 million last year. Oil refining, lottery and gaming, cement and power companies fill out the roster’s heavy hitters.

This week’s agreement with the EU unlocks €2 billion in loans and a further €10 billion to prop up banks. It also keeps the country on track to receive a further €61 billion in loans. Piling on debt is no solution in itself, but it will help Greece during this tough period of restructuring.

Though it is difficult to compare countries, Ireland has made a remarkable recovery after years of recession and drastic cutbacks in public spending. The economy is the fastest growing in Europe, expanding at 5 percent in 2014 and is on a 6 percent pace this year. The crippling debt-to-GDP ratio of 125 percent in 2013 is expected to soon be below 100 percent.

It is unlikely that Greece can rebound as nicely, but even a modest expansion that taps pent-up demand should lead to a surge in corporate profit and improved stock prices. Our sell target range for GREK is $17 to $23.