Strategy Note /

ECB needs to address fragmentation risk for Greece equities to perform

  • Highly indebted Greece clearly exposed to rising yields and the degree to which the ECB can calm fragmentation concerns

  • Otherwise, Greece is relatively well positioned in EM: net exporter of fuel and food, tourism recovery, reasonable value

  • Historical perspective may be warranted: Greece bond yield and spread over Germany not close to historical crisis levels

ECB needs to address fragmentation risk for Greece equities to perform
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
15 June 2022
Published by

The signal of a more rapid withdrawal of monetary stimulus than previously anticipated by the European Central Bank (ECB) has triggered a new round of fears over fragmentation or break-up risk for the weaker sovereigns in the Eurozone.

At the time of writing, the ECB has just concluded its 15 June emergency meeting to address the perception that it failed to provide sufficient detail on how that stimulus is withdrawn.

Whether the initial message after the meeting that there will be flexibility on Pandemic Emergency Purchase Programme (PEPP) reinvestment and a new 'anti-fragmentation' instrument is sufficient to calm investor concerns remains to be seen.

Greece is again caught in these cross-hairs, with gross debt/GDP of 185% in 2022, according to IMF forecasts.

The Greece 10-year bond yield is near a five-year peak. The rising cost of sovereign debt will be painful for what otherwise is a relatively attractive investment case built on tourism recovery, net fuel and food exports, and a PE valuation that is well below the historical average.

Nevertheless, the spread versus Germany 10-year bond yield is close to the past five-year average. And Greece's yield and spread over Germany is far lower than those seen in 2012 or 2015.

Greece disquiet over rising bond yields and Eurozone 'fragmentation' risk but some historic perspective is in order

Greece equities revisited

Top-down, Greece equities are relatively well-positioned on some of the key negative (high fuel and food prices) and positive (recovery of tourism post-Covid) drivers in EM. Valuation is also reasonably attractive versus history.

  • Fuel and food imports and inflation relative resilience – Greece is a net exporter of fuel (amounting to over 5% of GDP at Brent above US$100) and a net exporter of food (over 3% of GDP at current international food commodity prices), and food staples take up 17% of household spend (similar to Poland, lower than 27% in Romania, or 24% in Thailand).

  • Tourism recovery — Tourism is a direct contributor of 9% of GDP (indirect is usually a similar number on top of this) and the resumption of international travel is a clear positive.

    Tourist arrivals in March 2022 were up 30% mom and 45% yoy. But full recovery to the arrivals level of pre-Covid March 2019 would imply over 80% growth from this point.

    There are other tourism markets in EM that are valued on lower PB versus history, but few with as much economic exposure to the sector.

Tourism in EM: economic exposure and equity valuation
  • Greece equities (local Athens Composite index) are down 14% ytd, better than down the 20-30% seen in East Europe EM peers. Trailing PB is 0.7x, a 5% premium to the five-year median. Consensus forward 2022 PE is 14x (for 22% earnings growth and 3% dividend yield in 2023), a 17% discount to the five-year median. (Greece is 25bps of the MSCI EM index).

Greece equities appear reasonably attractively valued