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Greek stock recovery fading away as ASE falls 21 pct on valuations

Inyoung Hwang & Namitha Jagadeesh

The curtain is coming down on Greece’s star turn with international equity investors.

Among the best-performing Europe gauges in 2013 after the government carried out the world’s biggest-ever debt restructuring, Greece’s ASE Index has become one of the worst, slumping 21 percent as lenders from Piraeus Bank SA to Eurobank Ergasias SA tumbled. Drops are trimming returns that approached 200 percent starting in June 2012 amid investments from hedge funds such as Paulson & Co. and Third Point LLC.

Equities with valuations triple the rest of Europe have come too far to be justified by an economy that is poised to emerge from a six-year recession, says Peter Garnry, head of equity strategy at Saxo Bank A/S. Investors are looking elsewhere in emerging markets for bargains as sanctions hitting Russia, Greece’s biggest trading partner, disrupt businesses.

“Greece was the trade last year, but I don’t think it’ll be the trade next year,” Garnry said in a phone interview from Hellerup, Denmark. “Investors looking for good returns should look elsewhere.”

Reclassified as a developing country in November, Greek stocks were unscathed by a currency rout plaguing other emerging economies in the first quarter. Now, shares from Brazil to Thailand are rebounding and Greek equities aren’t following, dragged down amid slumps in European markets.

ASE slump

The ASE has lost 11 percent since the end of June, the third-biggest drop among 92 national gauges worldwide, and is down 21 percent since reaching an almost three-year high on March 18. The retreat this quarter compares with declines of 7.7 percent in Italy’s FTSE MIB Index, 5.2 percent in Spain’s IBEX 35 Index and a 17 percent plunge in Portugal’s PSI 20 Index.

The Stoxx Europe 600 Index has fallen 2.4 percent since June 30 amid crises in Ukraine, Iraq and Israel. The MSCI Emerging Markets Index has advanced 2.5 percent since then.

Greek stocks started rallying about three months after the country carried out the world’s biggest sovereign-debt restructuring in March 2012, when the nation got private investors to forgive more than 100 billion euros ($134 billion) of debt. While the ASE is up 128 percent since its low three months later, it remains down 80 percent from the high in 2007.

The Greek index trades at 42.6 times analysts’ earnings estimates for the next year, compared with 12 for the emerging- markets gauge and 15.1 for the Stoxx 600, data compiled by Bloomberg show.

Recovery threat

Russian sanctions on European Union food imports in retaliation to penalties over the Ukraine crisis threaten to derail the Greek economic recovery. Russia consumes about 25 percent of Greece’s peach production and half its strawberries. The value of trade between Russia and Greece totaled $9.3 billion in 2013, mostly in gas and oil, according to data compiled by Bloomberg.

“The risk of things going wrong both internally and externally are quite significant,” Matthew Beesley, who helps oversee $125 billion at Henderson Global Investors Holdings Ltd., said by phone. “That’s why when you’re buying Greek equities, you want to make sure you’re buying these businesses at a discount.”

While economists forecast Europe’s most indebted nation will post its first annual expansion since 2007, a report showed last week that the country’s gross domestic product dropped 0.2 percent in the second quarter, after a 1.1 percent decline in the first three months of the year.

Banks decline

Shares of Piraeus Bank, Eurobank and the National Bank of Greece SA -- among the biggest on the benchmark ASE -- have fallen more than 30 percent since March 18. Bank of America Corp. lowered its rating on Greek lenders on Aug. 5, citing uncertainty over how they will fare in European stress tests due later this year.

Bond investors too are walking away from Greece. The Bloomberg index tracking the nation’s debt fell 1.8 percent since the end of June after five straight quarterly rallies, the longest streak since 2005.

Those betting on more gains in Greek stocks are hanging on. John Paulson, the billionaire investor who bought shares in Alpha Bank SA in 2013, boosted his holdings of the nation’s lenders in the first three months of the year and still holds the positions, according to the firm’s second-quarter letter. Daniel Loeb’s Third Point Hellenic Recovery Fund posted a 12 percent gain from the start of 2014 through June, a person with knowledge of the matter told Bloomberg News last month.

‘Quite good’

“Looking at the macro side, Greece actually looks quite good,” said Maarten-Jan Bakkum, an emerging-market strategist at ING Groep NV in The Hague. “This is a turnaround story. It’s not in a recession anymore. Greece has much more room in coming years to grow.”

The ASE began to climb in June 2012 after plunging 52 percent in 2011 as Greek corporate profits fell for three years and posted a loss in 2011, data compiled by Bloomberg show. Earnings at ASE companies jumped to 73.41 euros a share in 2013, compared with a loss of 216.79 euros in 2012.

Analysts say earnings will slip to 25.50 euros in 2014, worsening at companies including refrigeration-equipment maker Frigoglass SA and Intralot SA, which designs and develops online lottery systems. Both reported losses for the second quarter, reversing profits the previous year. Coca Cola HBC AG, which has the second-largest weighting on the ASE and is the world’s second-biggest bottler of Coca-Cola, said on Aug. 11 that quarterly sales slid 5 percent.

Hurdles to Greece’s recovery remain, according to Thomas Wilson of Schroders Plc. The recession destroyed about a quarter of its economic output between 2008 and last year, sending unemployment to a record 27.9 percent in September. The International Monetary Fund said in a report last month that Greece’s program of reforms is slowing.

“We don’t disagree that the economy is stabilizing,” said Wilson, the head of emerging-market equities at Schroders in London. His firm manages 268 billion pounds ($448 billion). “Where we’re more cautious is what medium-term growth looks like. You need to see the government continue to reform in order to improve Greece’s international competitiveness and attract more inward investment.” [Bloomberg]

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