Greeks For Peaks: Why GREK Is Your Next Gem (NYSEARCA:GREK)

The time when the tide lifted all boats has passed and lower risk – higher return investment opportunities have become more scarce. Investors who wish to shield their capital from inflation have (mainly) three options:

• Invest in high-income stocks or preferred shares
• Invest in short to medium term corporate bonds
• Search for investment opportunities in distressed markets

Today, we’re dealing with option number three. We’re taking a look at Global X MSCI Greece ETF (NYSEARCA:GREK) and provide reasons why it is set to outperform the general market, in a difficult year such as 2023.

Why GREK

Favorable macro trends

As its name implies, GREK invests in Greece’s top 25 listed companies. Greece has had its fair share of economic troubles during the last 10 years, leading the country to the edge of bankruptcy and the adoption of a local currency. Fortunately, these times are well behind and Greece’s economy grew by more than 6% in 2022, while in 2023 it is expected to expand another 1.5%, according to the Bank of Greece.

At the same time, European Union saw its annual GDP growth rate to underperform that of Greece’s, as it is shown in the graph presented above. The same pattern goes on in other macroeconomic areas as well, with one of the most important being the lower-than-average inflation rate observed in the country. While the 7.2% rate recorded in December isn’t exactly stellar, when compared to the EU’s average of 9.2%, it becomes a pretty nice figure. The price growth in the EU is mainly driven by higher energy prices and the subsequent rise in the cost (and price) of food, alcohol, and tobacco. This explains the country’s better-than-average performance partially, as its energy mix is comprised of cheap coal and a rapidly expanding grid of renewable energy facilities. The notion of the country’s energy transition gives rise to investment opportunities in companies previously focused in the refining and trading of petroleum products, but now moving their focus to clean energy production, including green hydrogen.

Stronger banking sector

Banks in Greece have been recapitalized several times during the country’s financial crisis. Today, we see a completely different picture. When I was writing my last article about GREK, the NPL ratio of the Greek banks was around 15%, while now, according to data from the Bank of Greece, it has reached single digits, lying approximately at 8.5%. Non-performing loans were a major burden on Greek systemic banks, making banks practically incompetent of providing loans to local individuals and businesses.

Moreover, after their consecutive recapitalizations, Greek banks had accepted the Hellenic Financial Stability Fund (HFSF) as their major shareholder, for the transition period towards balance sheet normalization, the fund recently decided to divest from these banks. The decision has been approved by the Hellenic Minister of Finance and is expected to provide more free float to the exchange listed funds and improve liquidity.

Investment grade is at the gates

After a decade of being in the junk, the Greek economy has seen its efforts come into fruition during the last few years. The cherry top of these efforts will come with the credit rating upgrade, which will put the country in the watchlist of global investment funds. For instance, Société Générale sees the country’s upgrade to take place towards the end of next April. Other investment firms appear to be more conservative, as the country’s course towards further economic expansion could be cut by the upcoming national elections, which will take place next June, at the latest. According to existing polls, the governing party, while being first by a safe margin, won’t gather the votes necessary to form a standalone government. Such a development would put the country into a course of a coalition government or second parliamentary elections. These are the things that investors generally dislike, so that’s a significant risk towards an early credit rating upgrade. Combine this with the upcoming Turkish elections, and the country may be heading into a storm, as the two countries’ relations aren’t exactly classified as “friendly”.

So why to invest in GREK?

The bottom line is that the Greek stock market is cheap, in general. While there’s always a reason for that, I believe that there’s still tremendous room for growth here. GREK has outperformed the S&P 500 by almost 15% during the last year. This move is further backed by a measurement of market cheapness, such as the market cap to GDP ratio. The Greek stock market currently boasts a quite low, 36% market cap to GDP ratio, while other developed economies such as Germany and have two or three times that figure. Combine this fact with the macro trends in the country, its lower than average inflation and better economic growth, and you have a cheap market to invest into. Plus, you don’t have to worry about currency risk.