GREK ETF: Almost Ideal (NYSEARCA:GREK)

Introduction

The Global X MSCI Greece ETF (NYSEARCA:GREK), a $200m sized product that covers 26 stocks, has proven to be quite a handy product over the past year, delivering total returns of 33%, at a time when Eurozone stocks have only witnessed upside of high-single-digits.

Underlying Conditions Look Good

Greece appears to have come a long way from the debt crisis that had strangled it for much of the previous decade. There have been encouraging developments across the board, be it the healthy labor market, political stability, fiscal prudence, etc., and in Q4 last year we also saw it recoup its investment-grade status (which it had previously lost in 2010).

From a growth perspective as well, Greece now looks like one of the more promising regions in Europe, where things appear to be relatively drab all around. As per the IMF’s recent economic outlook which came out only last month, the Eurozone will likely only witness sub-par GDP growth of 0.9% this year, yet Greece will grow at over 2x that pace with expected real GDP growth of 2.1%.

That growth figure for Greece could potentially be underestimated as the economy looks set to receive around EUR55bn (all the way through FY25), as part of the EU’s structural and recovery funding package, which could potentially end up boosting GDP by another 1% annually.

Greece is also doubling down on its investment plans (7% growth in 2023), and we’ve seen how this has translated over the years as a percentage of GDP. Around 10 years back, gross fixed capital formation as a percentage of GDP was less than 12%, now it has almost doubled.

Crucially, in FY24, investments in Greece are expected to grow at more than twice the pace of last year, with Reuters forecasting a figure of 15%. With such a heady appetite for investments, it makes a great deal of sense to own entities that will be keenly involved in the financing of these projects, and in that regard, GREK certainly looks quite alluring as 43% of its holdings consist of banks alone.

One doesn’t envision the banks being particularly cagey about growing their loan book, as the non-performing loan (NPL) ratio has been normalizing at quite a rapid pace. For context, in 2022, the NPL ratio for the major Greek banks had stood at around 10%, but the most recent report which came out in January showed that this had dropped quite significantly to 5%. It’s quite telling that Greece did not withstand a spike in NPL formation, but one contributing factor could be the joint discipline shown by Greece’s top four banks, to put a lid on the yields charged on their floating rate mortgage book. Convalescing asset quality means Greek banks don’t have to worry about channeling a greater chunk of their pre-provision profits toward this counter. This also opens up the distribution narrative with dividends poised to resume in March 2024. Crucially also consider that these Greek banks are still priced at inordinately low valuations of 5.7x P/E and 0.66x book value.

The tourism sector is also a pivotal cog of Greece, accounting for 25% of its GDP, and it looks like this has more than normalized. For instance, note that passenger traffic at the Athens International Airport hit 28.2m last year, 24% more than in 2022, and 10% more than the pre-pandemic levels.

Then, if you’ve kept abreast of our work before, you’d note that we’re big on the concept of mean-reversion in the financial markets, and closely track the relative strength charts to scoop up suitable opportunities. In that regard, we’ve looked at how Greek stocks are positioned relative to their peers from the Eurozone, and the takeaway here is that, despite a strong performance in recent periods, this ratio still has the scope of mean-reverting, as it is still a good 35% off the mid-point of its long-term range.

The allure of Greek stocks is further bolstered by how alluring the valuations currently look. According to Morningstar, GREK’s holdings can currently be picked up at a lowly weighted average P/E of less than 6x. That would represent a remarkable discount of 55%, relative to the iShares Eurozone ETF’s corresponding multiple of 12.4x.

Closing Thoughts – Is GREK ETF A Good Buy Now?

Clearly, there’s a lot to like about GREK and Greece’s underlying progress, but given the developments on the ETF’s standalone charts, we’d urge investors not to get too exuberant at this juncture.

The price imprints of GREK’s monthly movements over the past 8-9 years highlight how the product has been gradually trending up in the shape of an ascending channel. We’ve seen multiple instances (highlighted in yellow), where the price has come close to these two boundaries and pivoted from there. As things stand, GREK is intriguingly positioned near the upper boundary of its channel. GREK may well break out from the channel and build a new base above it, but we think it’s preferable to be a little sensible about deploying fresh capital at these levels, given how long these channel boundaries have held. GREK is a HOLD for now.