Crazy About Greece

 | Jan 23, 2012 | 1:00 PM EST  | Comments
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GREK

This commentary originally appeared Jan. 23 at 9:45 a.m. on ETF Profits – to access all the strategies from our team of ETF professionals, click here.

I should start with a warning: The rest of this column might make some of you think I've gone off my rocker. It might sound crazy, but I think the Greece ETF is a definite buy that is offering up a compelling risk-adjusted return opportunity. It's certainly not a slam-dunk -- the country remains on the brink of a complete collapse -- but recent developments have increased the likelihood of a relatively strong performance in 2012.

Greece has been quietly closing in on a deal with private creditors to write down the country's debt by about 50%. Under the deal, Greek bonds held by private creditors would be replaced by new debt that would feature coupons of about 3.5% for shorter maturities and rise to about 4.6% for longer-dated debt. Those borrowing costs are only a fraction of what Greece is currently paying; yields on 10-year Greek debt are currently in the neighborhood of 35%, meaning that the market is pricing in a huge chance of default. Borrowing at those rates is obviously out of the question, as those costs would only deepen the fiscal mess in which the country currently finds itself. But if Greece is able to slash its total debt by about €100 billion, saving billions in interest payments annually, the International Monetary Fund and European Union will reportedly be much more open to extending further support to the cash-strapped eurozone nation.

Though talks hit a snag last week when the IMF and Germany stepped in to apply pressure for even lower interest rates, it seems likely that a positive outcome will be forthcoming this week. No party has an interest in letting Greece default on about €15 billion in obligations that will come due in March. With European markets off to a hot start in 2012, the flexibility to prop up the struggling country has improved a bit, and I fully expect that leaders will come to an agreement in coming days.

Greece has a long, challenging road to recovery. Greek companies are going to have a rocky road ahead, and the economy won't be thriving any time soon. But because Greek stocks have been hammered so severely over the past several years, this asset class has the potential to see a surge in value even if the country is a long way from a return to fiscal stability and sustained GDP growth.

The FTSE/ASE-20 Index, a benchmark comprised of 20 large Greek companies, has shed almost 90% of its value since the Greek system first encountered turbulence in late 2007. Recovering even a small portion of those losses would mean a huge gain for investors who buy at the bottom.

While Greek equities make their way into a number of broad-based European equity funds, the only pure-play fund on the market targeting this country is the Global X FTSE Greece 20 ETF (GREK). The price-to-earnings ratios for many components of GREK are in the single digits. Hellenic Telecom, one of the top five holdings in this ETF, has a PE ratio of only about 5x. It's a similar story throughout the roster of 20 or so holdings.

Though Greece is deep in debt and harsh austerity cuts lie ahead, many Greek companies remain profitable. Despite the tremendous challenges posed by the current environment, Greek consumers continue to make purchases. That bodes well for the future of the Greece ETF: If these companies have managed to survive through the recent chaos, they have a strong likelihood of thriving when Europe emerges from its debt crisis. It's also worth noting that GREK reflects something of a survivorship bias in its present form; the ETF is now comprised of stocks that have endured the chaos of the last four-plus years and managed to remain the largest publicly traded companies in Greece.

Greek companies will continue to operate even if the government defaults on its obligations or the euro becomes a thing of the past. The components of GREK will continue to generate revenue even if the road to recovery is a long and challenging one.

Coca-Cola Hellenic (CCH, 16% of assets) will continue to sell soft drinks. Opap SA (12%) will still sell lottery tickets and handle sports-betting operations. Hellenic Telecom (8%) will still be needed to provide wireless services. Unless Greece is wiped off the map, these companies will be around for years and will likely continue to generate profits for shareholders.

With lingering uncertainty over Greek debt, it could be a good opportunity to snap up a few shares of GREK as a bet on the authorities in Europe taking the unpleasant but necessary steps to prop Greece up. There will no doubt be some short-term volatility, but for those willing to hold a position for the long-term, buying GREK at a huge discount should be a great opportunity.

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