Greece: Deep-Value Opportunity with Near-Term Catalysts

Greece offers an investment alternative for those looking to diversify into a country that is emerging

There are few compelling deep-value opportunities globally with the run-up in asset valuations. Furthermore, there are even fewer with defined catalysts which increase the probability of realizing a highly asymmetric risk-return investment. We believe that Greece represents such an opportunity. The coming year could be a transformative year for Greece due to the imminent catalysts of elections and clean-up of the banking system, while the country emerges from a multi-year financial crisis and, we believe, is poised for dramatic uncorrelated growth. The team at Waterwheel Capital Management, Greece specialists, outline this compelling investment opportunity.

The Opportunity Set

Whereas developed global markets are late-cycle and trading at higher valuations, Greece offers an investment alternative for those looking to diversify into a country that is emerging from years of financial crisis with the potential for high growth and attractive investment returns in the years ahead.

Key Drivers of Transformation for Greece

Imminent Elections: After reversing a large fiscal deficit, Greece is now generating large surpluses. Meanwhile, the far-left government has been ideologically neutered by Europe, resulting in economic indicators that hover near post-crisis highs. Elections will be held in 2019, with New Democracy, the pro-business party leading by 10%+ points in the polls (pollofpolls.eu/GR as of 12/11/18). New Democracy has an aggressive plan to unshackle the potential of the Greek economy that has been held back by structural impediments, bureaucracy, and lack of investor confidence in the current Leftist government.

Clean-Up of the Banking System: There are also now two complementary plans to clean up Greek bank non-performing exposures, which we expect to be implemented soon. The rapid removal of non-performing exposures from bank balance sheets will eliminate this overhang and allow the banks to show significant internal profitability generation, returns on tangible equity, and growth.

We believe that the Greek market, for technical rather than fundamental reasons, is not pricing in the current recovery picture and not at all pricing in the blue-sky scenario that could ensue post-election with a pro-business government.

Specifically, this technical factor is driven by Greece sitting at the center of the Venn Diagram of several different disfavored themes (European financials and stocks more broadly, peripheral European markets because of Italy, and emerging markets generally because Greece sits in these indices). However, we think that placing Greece within these themes is inappropriate and that perceived risk is greater than actual risk, setting Greece up as a “contrarian cubed” trade as the catalysts materialize. If our thesis plays out, we believe returns could be 2-3x from current prices, with the banks leading the way.

The Last Decade in Greece

Blue Sky ??

• 2019: Transformational elections likely in first half with pro-business New Democracy leading by 10%+ points
• 2019: Launch of game-changing NPL clean-up structures to accelerate normalization of banks

Stabilization

• 2018: Various plans begin to be made to assist banks in expediting non-performing loan disposal
• 2018: Country emerges from European programs; bailout era ends
• 2018: After a 40-50% reduction from pre-crisis highs, real estate prices finally begin to rise again
• 2018: Economic sentiment, PMI hit post crisis highs while unemployment marches lower
• 2016: Government prints 0.5% fiscal surplus

Austerity

• 2015: Election of current Leftist government (Syriza); unsuccessful challenge to European control
• 2012-13: Private sector government debt haircut and bank recapitalizations

Financial Crisis

• 2009: Government revises official figures to show shocking 15% fiscal deficit
• 2009: Financial crisis begins the European bailout era in Greece; enforced austerity through European programs

Greece is Finally Emerging from a Deep Economic Trough, Despite its Current Government

GDP growth is well off its lows but has yet to break out to robust levels.

PMI levels near post crisis highs show the gathering momentum which could propel GDP higher.

Measures of consumer and business sentiment have dramatically improved and although unemployment has been moving lower, a spark is needed to ignite the true growth potential of the Greek economy.

The impending elections could serve as a catalyst for a positive shock to the economy and bring forth a new era of business-friendly policies.