Declining staired pathway on Greek island during sunset
Photo by H Fall on Unsplash

Published on January 7, 2021

Nearly four months ago, I published two posts (1 and 2) explaining how investors can understand and take advantage of market cycles. However, the real challenge and opportunity are in execution, so today I’ll cover an example of an actionable cycle to make the theory tangible.

Although I had been thinking about using the cycle in Greek stocks and government bonds, this tweet by SantiagoAuFund in early December drove the idea home for me.

I don’t see any opportunities like this in the current fixed income space, but think about how these bonds have performed despite everything else going on.  Despite Greece’s issues to this day, many Greek stocks have also provided strong returns over the past five years.  

Greece is also a great case study due to the length of the cycle. You can see different levels of performance in various sectors.  By investing in other assets and different stocks at different times, investors can increase their returns.

In this post, we will cover:

  • A Quick Recap of Investing Through a Cycle
  • Trough and Early Recovery in Greece and What Worked
  • Growth in Greece: What’s Been Working
  • What Greek Stocks to Invest in Next
  • A Word of Caution on the ETF GREK
  • Conclusion and Caveats

A Quick Recap of Investing Through a Cycle

Feel free to skip this section if you read the prior posts. We will cover the basics of the economic cycle, so the rest of the post makes sense.

Economies don’t grow in a straight line and usually ebb and flow in a general trend. These ebbs and flows in the modern era are typically caused by the debt cycle—and random events like COVID.  These ebbs and flows are usually broken down into four phases:

  1. Recession
  2. Trough
  3. Recovery
  4. Peak

Each phase has a different set of characteristics, and different investments perform differently in each phase. The investment cycle attempts to forecast the economic cycle and typically leads to underlying economic activity. For example, in recessions, defensive stocks and local currency government bonds tend to outperform, so cognizant investors will begin allocating to these assets during the peak. The same anticipation works in other parts of the cycle.  

I emphasized the local currency above because it means governments do not have to default on them. Greece’s government bonds are not local currency (more on that later). These investments make sense as investors seek safety and robust businesses that do better when people are frugal.  

At the trough and the early phases of the recovery, credit (think corporate bonds) makes a lot of sense, along with specific sectors that are the prime drivers of the particular economy. For many, this is manufacturing, but for others, like Greece, this can also be tourism. During the transition from the recovery to the early peak, the most economically sensitive sectors make the most sense: financial stocks and high yield credit. Finally, as the economy begins to peak and then roll over, one should transition to those investments that work best in recessions highlighted above.  

I know the above analysis is brief and over-simplified. As we’ll discuss at the end of the post, there are exceptions, and no situation is the same, but I hope this general understanding gives context to the points below.  

Now, let’s see how this has been playing out in Greece since 2010.  For the big view, here are the charts of Greece’s nominal GDP in USD and GDP growth over that period:

Chart of Greece GDP and GDP Growth Rate

Trough and Early Recovery in Greece and What Worked

Let’s start with a quick review of the events that brought Greece into recession. Greece restructured its government debt in 2012, but the problem started much earlier. Through the 2000s, Greece had added debt for various reasons but, to appear to comply with EU rules, hid such debt with investment banks’ help. As all of this debt came to light during the GFC, it was clear that Greece could not afford to pay its debts. Initially, the EU and the European Central Bank supported Greece by buying Greek government bonds and providing fresh cash to the government.

Once it became apparent to them that Greece needed to restructure, the EU, ECB, and IMF then made any future support contingent on restructuring the country’s bonds held by private creditors. It is important to note here that Greece, like all countries using the Euro, cannot simply print their currency. The Euro is not technically controlled by any country that uses it.  For example, in the US, the Federal Reserve can lower interest rates or buy bonds (quantitative easing) on its own, but Greece could not. Thus, Greece’s government bonds had a real credit risk. This is wildly apparent now, but the implications of this were only coming to light for most at the time of this crisis, and there was no precedent.

So, as Greece went through the initial recession, there was NO safe, reliable investment. In countries with control of their own currency (and a few other constraints), one could buy local sovereign bonds because any government and central banks’ response to such a downturn would be to lower interest rates or (over the last 12 years at least) use quantitative easing.  Moreover, because the Greek sovereign itself needed to restructure, the implications for the broader economy were unknown such that even local defensive stocks were not as good an investment as they normally might be.

After the Greek government finally restructured its government bonds in the first half of 2012, were there opportunities? Yes, but how could an investor know the worst was over for Greek debt? One could not be sure, but there were several important things about the restructuring and the immediate aftermath that could have given investors comfort and a margin of safety:

  • Greek bondholders took a 70+% haircut and now represented a minority portion of Greek government debt.  Additionally, the EU, IMF, and ECB would continue to provide government funding, further reducing private creditors’ part of the debt. This is important because, even if Greece had to restructure again and immediately, being harsh with the privately-owned debt would not fix anything.
  • For various reasons, the restructured bonds traded terribly after the restructuring and traded in the teens before recovering. At these market values, the debt was an even smaller portion of the total debt, and even if restructured again, investors could expect a high return. If an investor buys a dollar for 10 cents, he can still make five times his or her money if the dollar is cut in half.
  • Finally, many incentives would dissuade the Greeks or the IMF and EU from restructuring the private debt again. I mentioned size already, but there was precedent for not immediately restructuring private debt again in the middle of a program, particularly if the IMF had not reprofiled its own debt. The EU and IMF would be incentivized to roll over their maturities, which is exactly what they have ended up doing.
  • The restructured debt cost was less than 3% and was well within the limits of affordability with the support Greece was being given at the time.

So, with an economic plan in place and the worst of the crisis over, where do we invest?  Earlier, I suggested that credit and defensive stocks were the places to be in a trough and early recovery. In Greece, at this stage, that meant two areas:

  • Greek government bonds
  • Equities or debt of Greek companies who exported goods or services

Greek bonds should have been (and were) the best trade in the Greek market at the time for a simple reason. The lowering of Greek government bond yields was a precondition for making credit accessible to the overwhelming majority of the Greek economy—essentially every company except those mentioned in point two above. Given that Greek 10 yr yields peaked at 29% (with no inflation) in the summer of  2012 after the restructuring, if Greece were not to be wiped off the economic map, yields would have to compress to the mid-single digits before Greek businesses could borrow money and banks could fund themselves, etc.  Lower Greek government bond yields were a gating factor for the rest of the economy.

Anyone who was investing in Greece or following the news would note that it took a LONG time—several years—for Greece to begin growing. The government kept balking at IMF and EU conditions, capital controls were introduced and tightened, and the banks’ equity holders were wiped out multiple times. This is all true and made this thesis especially hard to see through, but these items were peanuts compared to the bigger issues that were already addressed.

Now, what about the companies under point two above? This category is usually my favorite investment. As an economy or market is troughing, these are quick to turn up. In this bucket, I lump companies who are world-class, a quasi-monopoly, or in a sector that has global tailwinds.  In a prior article, I talked about buying a company in Portugal that was the leading and dominant manufacturer of cork products globally. Its business declined during the financial crisis in Portugal, but its valuation multiples declined even more because it was based in Portugal, even though its business was not purely Portuguese. Greece has similar companies. The ones for me that stood out were:

  • Motor Oil Hellas (ASE Ticker: MOH, US ADR OTC: MOHCY)
  • Metka (Acquired and delisted)
  • Mytilineos (ASE Ticker: MYTIL, US OTC: MYTHF)

Motor Oil Hellas is an oil refining company. It operates one of the eastern Mediterranean’s highest quality refineries, and most production was exported to other countries. Because its business was global, it benefited from tailwinds beyond Greece but was trading at a subdued multiple because it was based in Greece. As investors realized its global drivers (which were also improving), the discount closed in a sector with expanding multiples.

Metka, which was majority-owned by Mytilineos, was an EPC construction company. During the crisis, nearly all of the company’s projects were outside of Greece, and it traded at low cash flow valuations despite being a partner for building GE gas turbines throughout the Middle East.  Given the structure of its contracts, the business was also self-funding.

Finally, Mytilineos is a conglomerate. It consolidates Metka above, has one of Europe’s leading integrated aluminum companies and, at the time, a nascent power generation business. Through its construction and aluminum businesses, the company derived a substantial portion of its revenue and profitability from outside of Greece. 

Other companies in Greece may have also made sense for investors, but these were the most attractive exporters. The charts here indicate performance.  I note that the Greek stock’s performance is in Euros. Therefore, I have included the performance for the FX to help gauge the impact. Metka is also not on the chart as Mytilineos acquired it in 2017, and I could not find the data.

Stock Performance Chart for Greek Stocks and Benchmarks

As you’ll see up until COVID, Mytilienos and Motor outperformed the SPY, the Greek ASE index, EEM and CRAK (the refiner ETF).

Growth in Greece: What’s Been Working

After the myriad of brinksmanship with the EU following the election of Syriza in 2015, a path was set at some point in Greece. Greece had decided to stay in the EU, the decline in GDP was decelerating, and things stabilized. From here, the economy actually began to recover in aggregate. This was (by my very rough estimates) between 2017-2019. Within this period, things were going from bad to good, and many sectors responsible for the main part of the Greek economy began doing well. The global outbreak of COVID abruptly ended this period.

So, where should investors focus in this recovery period?

Generally, it should be the economic base of that particular country. There are certain things that are a base of any economy and others that may be a base. For any economy, energy use and essential retail will grow if the overall economy grows. Credit assets (think loans and corporate bonds) will also be great in this period. For other ideas, we need to look at each country. In Greece, tourism, trade, and commerce make up a large portion of the economy and drive growth.

On the Greek stock exchange, there were a couple of ways to play this:

  • Mytilineos (ASE Ticker: MYTIL, US OTC: MYTHF)
  • Aegean Airlines (ASE Ticker: AEGN, US OTC: AGZNF)
  • Jumbo (ASE Ticker: BELA, US OTC: JUMSF)
  • Fourlis (ASE Ticker: FOYRK)
  • Piraeus Port Authority (ASE Ticker: PPA)

The above list is not exhaustive but is meant to give you an idea of ways to play the cycle. In each case, companies have their own idiosyncratic risks and should be vetted through a standard process before investing a cent.

Mytilienos appears on the list again, given its exposure to the power sector and migration to constructing infrastructure in Greece. These two business segments are key to growth in any economy, and Mytilineos was well-positioned for both. During this time, Mytilienos increased its ownership in its infrastructure business, Metka.

Aegean Airlines is Greece’s national carrier and a quasi-monopoly for domestic flights. Given Greece is a slender spread out landmass with many islands, it is conducive to ferry and air travel. The only time I have personally gotten seasick was on a ferry between Greek islands, so I can personally attest to air travel’s desirability when available. As tourism rebounded, Aegean Airlines stood to benefit from increased traffic.

Fourlis and Jumbo are two retailers. Jumbo runs hypermarkets (uninitiated American readers, that is European for Walmart/Target style stores), while Fourlis franchises Ikea and runs sporting goods stores in Greece and select countries.  To the extent that an economy has any significant consumption component to GDP, which nearly all developed countries do, these retail types should do well.

Finally, Piraeus Port Authority operates Greece’s largest port terminal near Athens. It is one of the largest ports in the Mediterranean.  Although influenced by global trade, the port benefits from Greece and its neighbors’ importation of goods. It also operates the ferry and cruise terminals making it somewhat sensitive to increases in tourism as well. These are all reasons to belong to this type of name, even if I only had the fortune of discovering it in early 2018.

Here is how these shares performed from the start of 2017 until now.  Not all were big winners, but none were big losers, either. 

Performance of select Greek stocks and benchmarks since 2017

Mytilienos remained the big winner along with PPA and Aegean Airlines pre-COVID. Jumbo and Fourlis were the laggards but performed comparably with the index and SPY. I note that the Euro performance boosted the returns, given its positive performance from the beginning of 2017.

What Greek Stocks to Invest in Next

So, where should investors look now in Greece? Are there still good bargains? I think so, and here is how I am analyzing the situation and what names I am currently invested in.

Relative to other countries, I think Greece is in much a better position.

Here’s why: 

  • Its debt is all low-interest long-term debt, largely owned by multilateral institutions (~70%) as of September 30, 2020.  See this bulletin from the Public Debt Management Office for details.
  • Greece is still below its peak GDP, both in EUR and USD terms.
  • Its private sector does not have a lot of debt compared with its European counterparts.
  • The Greek economy was playing catch up before COVID and is already accustomed to dealing with many of the crises that COVID brought about, including loan forbearance, resuming tourism, etc.  

Many Greek stocks were pushed back to levels seen back in 2016 BEFORE the recovery had really started, making many a bargain in terms of pricing. Given the global restrictions placed on tourism and the economy as well as the initial manufacturing slowdown, the economy may have also been shifted back into the early recovery phase of the cycle as well, and this is where I have been focused, principally in the following names:

  • Mytilineos (ASE Ticker: MYTIL, US OTC: MYTHF)
  • Piraeus Port Authority (ASE Ticker: PPA)
  • Aegean Airlines for a speculation (ASE Ticker: AEGN, US OTC: AGZNF)

I have discussed the general reasons for Mytilienos already, and I believe that all of its business lines currently stand to benefit from the current economic situation. Mytilienos also has tailwinds from its EPC business’s focus on renewables. 

Piraeus Port Authority should continue to benefit from the resumption of global trade. Furthermore, it is still cheap compared to peers from a valuation perspective. Finally, the company will likely continue to have access to concessional financing from the EU at virtually 0% interest rates.  

I usually never invest in airlines, but in redrafting this article and thinking about tourism and the vaccine developments, Aegean may get a further boost. It has room for catch up (along with generous comps) to look forward to next year. If I do get involved, it will be a minimal position.

One may also look at the retailers, but it is not a sector I am expert at.

Finally, in the interest of disclosure, I also have and am analyzing speculative positions in Greek financials.  They should generally be allocations later in the cycle once a recovery is well underway. Still, I am analyzing Eurobank (ASE Ticker EUROB, US OTC: EGFEY) and already have a speculative position in Cairo Mezz plc (ASE Ticker CAIROMEZ, US OTC: CMZZF). The positions are more a reflection of the recent technical picture. Most Greek banks have broken through their patterns that arose during COVID, but I believe the underlying fundamentals still have some headwinds. As the economy improves, these will be the late-cycle focus. 

A Word of Caution on the ETF GREK

Some readers may have built a reflex to read this article and decide they want to buy broad exposure and not think about it. There is the GREK ETF, which attempts to track an MSCI Greece index.  

Caveat emptor, the composition of this MSCI Greece index has fluctuated dramatically in recent years. Before the summer of 2019, most of the GREK index was financials. From what we have discussed, financials were not the right sector for that point in the cycle. Now, the index is less than a quarter financials, and the top holdings are the local telecom company, a gaming company, and the retailer Jumbo. I am not saying the composition of the index may not make sense from time to time, but check its composition before you buy to make sure it overlaps with the cycle and your fundamental work.  

Here is GREK’s chart since April 2012, along with the SPY, ASE (Greek Stock Index), OTE (the largest non-financial Greek stock and currently largest holding of GREK), and the four main banks in Greece.

Stock performance chart of ETF GREK, Greek stocks and benchmarks

As you can see, GREK underperformed basically everything. Why? Look at the performance of the four Greek banks at the bottom. All of them got effectively zeroed and, going into the Greek crisis right up until relatively recently, were the largest components of the ETF. 

Conclusion & Caveats

This article tries to cover a complex topic extremely quickly. I have left out sectors and certain Greek stocks, which, at certain times, may have been or still be good investments.  Also, in Greece, we had the unique experience of a government bond default in the Eurozone, the only one thus far. So, I wanted to cover a couple of critical caveats and points to fill in the blanks.

  • The trade-in Greek bonds were a once in a decade opportunity: Abnormally high Greek government yields after default and extremely loose Euro monetary policy thereafter have created ample room for Greek yields to compress over the last decade. This is not normal.  
  • Investing in Greek stocks is not straightforward for many.  ADRs are limited, and only some trade OTC. You may have to buy Greece shares cross-listed on other European exchanges. If you cannot buy shares directly in Greece, limit orders on the available venue are the best route, with a price that approximates the Athens exchange price, adjusted for differences in FX.  Fidelity is the only US discount brokerage I have found where investors can buy shares listed in Greece directly. Other full-service brokers can likely also facilitate, but commissions will be relatively higher.
  • Greece is a small country both population and GDP-wise, so it should come as no surprise that its companies may be relatively smaller than in other markets. In fact, no company listed in Greece has a market cap greater than $10 billion, which is to say nothing of the float. So, bear that in mind and that this area should be for smaller or nimble investors.
  • Just because a company is in the right sector for the point in the cycle does not mean you should automatically invest in it. The opposite also holds. Sector and asset allocation are major components of return, but if you pick single stocks, make sure the investment meets your other criteria. The ones I’ve highlighted in this article have met mine, but they may not meet yours. Examples of such measures include leverage ratios, cash flow metrics, not investing in certain sectors, and view of management. I’ve also mentioned I don’t like investing in retail.  You get the picture. It may mean you don’t pick the top performers, but you keep peace of mind.

I hope this article has given readers some context on applying my prior writings on cycles in a real-world situation. By understanding changes in the growth rate of an economy, its sectoral composition, and the local stock market’s makeup, investors can have a general investing roadmap for particular markets. No country or map is the same and will therefore require a bit more leg work. The rewards, however, should be worth it.

As more examples come up, we will cover them in this blog. Finally, kindly note the disclaimers at the bottom of the page.

To your investing adventure,

The Castaway Capitalist

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IMPORTANT DISCLOSURE: As of the date of publication, the Castaway Capitalist owns the following Greek stocks: MYTIL, PPA, and CAIROMEZ

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