As Greece tackles its structural challenges, value investors return

Value investors are returning to Greece, hopeful that if improving macro-economic conditions persist, the coming year will prove a major boost to Greek small cap stocks.

Uncertainties certainly persist: the government has still to agree a post-bailout strategy with the Troika of lenders (made up of the International Monetary Fund, The European Commission and the European Central Bank). There is an estimated €1 billion shortfall in Greece’s proposed 2018 privatisation programme (which may impact personal tax and VAT measures), and an election cycle is set to begin soon.

But there is growing evidence of a widespread economic recovery and a large reduction in country risk due to more positive relations with international creditors.Ratings agency S&P has upgraded Greece by a notch to B with positive outlook and for the first time in the decade since the global financial crisis, January saw monthly inflows into Greek domestic mutual funds.

“A sustained recovery would be extremely supportive to our smaller names, which are largely overlooked by foreigners, who go for the big stocks. We look more closely at smaller companies which are better known by local fund managers,” noted Arrash Zafari, manager of QUAERO CAPITAL’s New Europe strategy. “The valuations in this space are still reasonably cheap and illiquid, so it does not take much to move them higher.”

He has committed significantly to the market, with 25-30% of the strategy invested there. “It is a big exposure but we have been on the ground in Greece for many years. Across central and eastern Europe, this is where we are now finding the most opportunities. Larger stocks seem fairly valued but it is an excellent stock picker hunting ground, with small caps cheap and orphaned.”

He adds: “We own a differentiated, bottom-up, value portfolio that is not at all quick or easy to replicate. We expect 100-200%+ upside in several of our holdings.”