Has Greece turned the corner?

Europe has been calm of late.  Former Italian prime minister Silvio Berlusconi is facing house arrest, and it barely makes the news.  A year ago, this would have caused a run on the euro and roiled the world’s capital markets.

And Greece, the country that first comes to mind when the words “Europe” and “crisis” are used in the same sentence, has been relatively quiet as well.

Actually, I should rephrase that.  Greece is far from quiet.  In fact, even doctors have taken to the streets in protest over…well…who cares, really.  The fact is that the capital markets have stopped reacting to news out of Greece.  Greek bond yields have bounced around in a fairly tight range all year and have actually been falling for the past two months…in spite of the global Fed tapering scare. There is a tacit understanding that Germany will continue to keep the Greek government afloat indefinitely, so long as Greece continues to at least make a credible effort at reform and austerity.

It’s not too terribly surprising that Greece will need more bailout funds this year and next.  But what is surprising is that Greece is slowly clawing its way out of perma-crisis.  Greece may actually post a primary budget surplus (i.e. a budget surplus excluding interest payments on existing debt) this year.  In fact, through the first seven months of the year, Greece reported a primary surplus of €2.6 billion.

Yes, you read that correctly, and no, it wasn’t a sarcastic joke.  Greece’s condition is actually improving.  The country still depends on its bailout lifeline for the fragile stability it has at the moment; any attempt to go directly to the capital markets would plunge the country back into crisis and probably default and ejection from the Eurozone.  And its economy is still contracting; GDP shrank by 4.6% last quarter.  More than a quarter of Greek are unemployed (see chart), and wages are falling.

Still, the GDP contraction is the slowest in two years, and we should remember that employment is a lagging indicator.  It’s not unusual to see unemployment remain high in the early stages of recover.

Is it time to consider Greek stocks?  Fellow “Best Stocks of 2013” contestant Meb Faber certainly thought so when he recommended the Global X Funds Greece ETF (GREK) back in January.  Meb was a little early on the call (which is a common curse on value investments), but he correctly noted that Greece had the cheapest stock market in the world.

Almost exactly two years ago, I mentioned three Greek stocks I would consider buying once the dust had settled after a sovereign debt default and possible ejection from the Eurozone.  Well, the default never happened.  But are the stocks a buy?

I’ll start with the Coca-Cola Hellenic Bottling Company (CCH).  Despite its name, this is not really a Greek stock.  It is based in Switzerland, has operations in 28 countries and serves 581 million people, primarily in Eastern and Southeastern Europe. Though listed on the Athens Stock Exchange, it also trades on the London Stock Exchange and on the NYSE as an ADR.

None of this is lost on the stock price.  For a nominally-Greek stock, Coca-Cola HBC is not cheap. It trades for 1.25 sales—only slightly cheaper than Coca-Cola Enterprises (CCE), the Coke bottler for most of Western Europe.  It’s price / earnings ratio—at 52.7—is overstated due to earnings being depressed.  But suffice it to say, this stock is not a screaming bargain by any stretch.

Hellenic Telecommunications Organization SA (HLTOY), as Greece’s leading phone, internet, and mobile provider, is a much purer play on Greece.  Its stock has also had an impressive run, up over 500% since bottoming last summer.

Yet despite the run-up, shares are not expensive, trading at 12 times depressed earnings and 0.85 times sales.  If you’re bullish on Greece, this is probably the safest way to play a rebound, though I should emphasize that Greece is still a very risky market.

And finally, we get to the National Bank of Greece (NBG), the third stock I said that I would consider two years ago.  Be careful with this one.  If Greece were to leave the euro or outright default on its debts—which, though not likely at this point, cannot be ruled out—this stock will be worthless.  If you buy this, you are making a bet that Greece stays in the Eurozone and continues to service its debts indefinitely.  Still, trading at 4 times earnings and only a few dollars away from its all-time lows hit earlier this summer, it might be worth a speculative bet.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he had no positions in any security mentioned. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”

VIDEO: Greece Downgraded to “Emerging Market”

Earlier this week, I wrote that Greece had been downgraded by MSCI from “developed economy” to “emerging market.”  In this video, I dig into the details and explain what this means for investors.

The point to take away is that your emerging market ETF or mutual fund may not be invested in the countries you expect.  It may be loaded down with already mature countries such as Taiwan or South Korea…or with basket cases like Greece.

Before you buy an emerging market ETF or fund, go to a financial website such as Yahoo Finance or visit the fund’s website to take a look under the hood.  Nearly all ETFs and mutual funds provide easy viewing access to their holdings.

See also: Greece Downgraded to “Emerging Market.” But Will It Ever Emerge?

Greece Downgraded to “Emerging Market.” But Will It Ever Emerge?

Most of us would agree that Greece is not a “developed market” on par with the United States, Canada, or Western Europe.  Its instability, pitiful economic governance, corruption and cronyism—all of which contributed to its spectacular sovereign debt crisis—prove that the country is not quite ready for the big leagues.

Morgan Stanley Capital International (“MSCI”), the provider of the indexes that comprise the popular iShares MSCI Emerging Markets ($EEM) and  iShares MSCI EAFE ($EFA) ETFs, among many, many others, acknowledged as much last week.  The MSCI Greece Index will no longer be classified as a “developed market” and has officially been demoted to “emerging market.”

I’m on board with Greece being declassified as “developed.”  But I do take issue with it being reclassified as “emerging.”

“Emerging” implies that the country will eventually emerge.  It implies that the country is going somewhere.  It implies a young population of upwardly mobile labor and rising living standards.  More than anything, it implies a country with a future.

By even the most generous interpretation, does Greece fit this (admittedly subjective) description?  Let us consider:

  1. The median age of Greek citizens is 43 years old.  To put that in perspective, the median American is 37 years old and the median Frenchman is 40.  Greece has a median age only three years younger than that of Japan (at 46)—which, with its massive population of elderly citizens, is fast becoming the world’s first nursing home nation.  Greece also has one of the lowest birth rates in the world. (Source: CIA World Factbook)
  2. Living standards are falling.  By some estimates, the standard of living in Greece will fall by fully 50% before the crisis and the assorted reform programs run their course.  By any objective measure, living conditions have deteriorated in Greece and won’t be improving any time soon.
  3. Even after more than three years of severe economic depression, Greece has a large trade deficit of nearly $17 billion.  And unlike most emerging markets, which have large manufacturing and agricultural sectors, services make up 80% of the economy.

Greece is not an emerging market…but you can’t by any stretch of the imagination call it developed either.  It’s a country that is stuck in something of a no man’s land: a country that is politically and culturally underdeveloped and unprepared for life as an “adult,” but too old, too urbanized, and with too bleak a future to be “emerging.”

Sadly, the best analogy I can come up with is an elderly person with advanced dementia who has regressed to the mental level of a child.

While it can be tempting to beat up on Greece, I have a legitimate and far more pressing reason for bringing all of this up.  When you buy an emerging market mutual fund or ETF, you need to take a look under the hood to see what you are buying.

Let’s revisit the iShares MSCI Emerging Market ETF ($EEM).  South Korea and Taiwan together make up a quarter of the ETF’s holdings.

Nothing against South Korea or Taiwan, of course.  But both of these countries have living standards close to those of Europe.  It’s hard to call these true “emerging” markets because they have already largely emerged.  Samsung ($SSNLF), the single largest holding in the fund, is arguably the world leader in smart phones, TVs and home appliances.  Great company, but not what I would think of as an “emerging market stock.”

This brings us back to Greece.  After the downgrade, will Greek stocks dominate the portfolio of EEM and other emerging market ETFs and funds?

Probably not.  And even if they did, that might not be such a bad thing in the short-term.  Greek stocks were one of the favored investments in InvestorPlace’ s Best Stocks of 2013 contest.

But my point remains: when you buy an ETF or mutual fund—emerging market or otherwise—you should spend that extra five minutes to visit the fund’s website and see what it owns.

Sizemore Capital has no positions in any security mentioned.


The Greek Debt Crisis In Historical Perspective

Greece is no stranger to economic crises such as the current one. The country has been in debt since its independence and has gone through a cycle of borrowing and defaulting numerous times. Foreign powers have always had an interest in maintaining Greece’s stability, so previously they always agreed to refinance its debts. The only new factor in Greece’s ongoing crisis is that the country is not as strategically important to outsiders as it was before the end of the Cold War, so foreign governments are not as interested in loaning Athens money.

With Greece again roiling world financial markets, it can be useful to step back and get an historical perspective.  Greece has been here before, and if history is any guide this will not be the last time.

If Greece has developed something of a bailout culture, it is because there has always been a Western power with a geopolitical interest in bailing the country out.  Whether it was Britain attempting to keep Tsarist Russia in check or the United States looking to best the Soviets in the Cold War, Greece has always had a patron.  By virtue of its strategic location in the Eastern Mediterranean, Greece mattered.

I’ve written favorably about geopolitical forecasting firm Stratfor and its prolific founder, George Friedman.  I wrote reviews of Friedman’s two most recent books (Book Review: The Next 100 Years and Book Review: The Next Decade) and continue to recommend both.

Today, I recommend you read Stratfor’s analysis of Greece’s debt woes, which first appeared on Stratfor.com as “Greece’s Continuing Cycle of Debt and Default“:

The ongoing financial crisis in Greece is a familiar situation for Athens. Greece has been in debt since its war for independence from the Ottoman Empire in the 1820s, which means international creditors and foreign sponsors have played a role in Greek finances, politics and economic development since then. Even though Greece has failed to achieve the expected gains from the reforms its Western creditors have demanded it make in order to pay back its loans, foreign powers have always had a strategic need for Greece and have thus refinanced or forgiven its debts despite numerous defaults.

Indebted from the Start

The modern state of Greece was born after 11 years of fighting against the Ottoman Empire (from 1821-1832). However, it was not until Western intervention in 1827 that the conflict turned decidedly in Greece’s favor. The war had disrupted commerce in the Eastern Mediterranean, and France and the United Kingdom were concerned that a power vacuum in the region would give the Russian Empire an opportunity to expand and gain direct access to the Mediterranean. They thus sought to balance any expansion of Russian power by positioning themselves strongly in a newly independent Greek states. When Greece finally achieved its independence, it was these three Great Powers — France, the United Kingdom and Russia — that negotiated the terms of that independence.

Despite the nationalist origins of the Greek conflict, the Treaty of Constantinople — negotiated by the Great Powers in 1832 — declared the Kingdom of Greece an absolute monarchy and appointed a Bavarian prince, Otto, as monarch. Since the 17-year-old Prince Otto was a minor when he was named monarch, a council of regents consisting of three Bavarian advisers who came to be known as the “Troika” — incidentally, the same term used for the International Monetary Fund (IMF), European Central Bank and European Union officials today — were appointed to rule in Otto’s name. One member of the Troika was particularly instrumental in establishing the framework for the new country: former Bavarian Finance Minister Josef Ludwig von Armansperg, who ultimately was appointed prime minister of Greece when Otto assumed the throne.

During the fight against the Ottomans, Greece accumulated a large external debt — a debt on which it defaulted in 1826, greatly restricting the new country’s ability to access international credit. The United Kingdom, France and Russia agreed to loan the new country 600 million francs. As a condition of the loan, the three countries maintained diplomatic representatives in Athens who were heavily involved in the creation and oversight of the Greek government. The Great Powers wanted to see immediate returns on their loans after the new country began taking shape. However, the only immediate source of internal revenue for Greece was agriculture. Loans were given to farmers to expand cultivation on land that was nationalized after the war. The financing terms of the state loans, which required a 3 percent down payment in cash, combined with an immediate and heavy tithe on the lands’ production, forced most agriculture laborers to borrow from the few private individuals who had access to large amounts of capital — mostly the wealthy members of the Greek diaspora and the merchant class. This created a cycle of debt wherein the state’s attempts to pay off its international debt resulted in an increasingly indebted population…

Greece in Modern Times

By the end of World War II, Greece, along with its European sponsors, was in economic ruins. In March 1947, the United Kingdom had to end the financial assistance it had provided Greece in varying degrees since the 1820s. However, the Communist insurgency that engulfed Greece immediately after World War II once again presented the threat of Russia (now the Soviet Union) controlling strategic points in the Eastern Mediterranean. This made Greece strategically critical to the single remaining Western superpower: the United States, whose military and economic aid to Greece during the Cold War prevented Communist forces from gaining influence in the country. In 1981, Greece became the 10th member of the European Economic Community (the predecessor of the European Union). After this, Greece received large loans and subsidies from the European bloc in addition to aid from the United States. Nonetheless, by the early 1990s, Greece’s lack of economic growth and massive budget deficit led the IMF and European Commission to supervise the country’s finances.

A Familiar Position for Athens

Greece’s current problems — a large external debt, high defense expenditures, a political system entrenched by its ability to provide its supporters with continual patronage, a capital-poor and import-dependent economy, an ineffective tax collection system, exclusion from international credit markets and the forfeiture of its fiscal sovereignty to external creditors — are problems Greece has faced throughout its modern existence. It has been in major powers’ strategic interest to ensure Greece’s stability since its independence from the Ottoman Empire, but it seems that nearly 200 years of international interest in developing the Greek economy has not done much to change Greece’s circumstances.

Article by Stratfor.  Full article can be viewed at “Greece’s Continuing Cycle of Debt and Default.”

Some things never change, though Greece’s strategic importance to the West perhaps has.  Greece has far less value as a military, diplomatic, or trading partner than, say, neighboring Turkey.  It will be interesting to see if, for the first time in two centuries of welfare payments, the West finally cuts Greece loose.