Worst Greek market slump since ’87 proves bears right

A Greek flag waves outside the Athens Stock Exchange. With Greece’s benchmark stock index about three times more volatile than the Stoxx Europe 600 Index, investors are bracing for more declines.

Bloomberg

London

Investors began giving up on Greek stocks even before the latest rout.

A US exchange-traded fund tracking the nation’s equities has had a record streak of redemptions, losing money for four straight months. The wagers proved well-timed: the benchmark ASE Index plunged the most since 1987 yesterday after Prime Minister Antonis Samaras opened the door for the ascent of an anti- austerity party in Greek politics. It dropped another 1.1% to 893.13 at 12:29 pm in Athens.

With Greece’s benchmark stock index about three times more volatile than the Stoxx Europe 600 Index, investors are bracing for more declines. The risk now is that Samaras may have to call a parliamentary election that Syriza, a party that doesn’t favour austerity, might win, reintroducing the turmoil that threatened the European currency union in 2012.

“The problem is that the government has a very slim majority and if it collapses, then the economy will collapse with it,” Thanassis Drogossis, the head of equities at Athens- based Pantelakis Securities, said in a phone interview. “It’s hard to tell investors to catch a falling knife. Prudence has to be the call here.”

Greek stocks tumbled this year as bank defaults in Portugal and a weaker euro-area economic recovery strained confidence in Europe’s peripheral markets. As Greece seeks to follow Ireland, Portugal and Spain out of a bailout programme, the rise of Syriza is raising concern over the nation’s recovery. The Stoxx 600 fell the most in almost two months yesterday.

Thursday was the most volatile day for the Greek stock market since August 2011, data compiled by Bloomberg show. In the past year, the ASE swung an average of 27.99 points between its day’s highs and lows, compared with 3.1 points for the Stoxx 600 and 7.59 points for the MSCI Emerging Markets Index. Normalised for the index levels, that means the Greek gauge is about three times more volatile than the two other measures.

This volatility is driving investors away. They pulled almost $100mn from the Global X FTSE Greece 20 ETF in the past four months. The US fund, holding shares such as National Bank of Greece, Piraeus Bank and Hellenic Telecommunications Organisation, trades near a 16-month low.

Last year, MSCI reclassified Greece as an emerging market, renewing optimism for the nation’s equities. Paulson & Co and Third Point were among those who bought some. The ASE rallied to an almost three-year high in March before slumping 34%. Michael Ingram, a market strategist at BGC Brokers, said few investors viewed Greece as a developing nation, adding to reasons why that didn’t help the shares.

To Alpha Trust Mutual Fund Management’s Dimitris Dalipis, the rout is overdone.

After Greece completed the biggest sovereign-debt restructuring in history in 2012, the Mediterranean nation cleaned up its public finances just as the European Central Bank stepped up its support for the region’s recovery. That helped the ASE Index almost triple through March. The Greek economy grew in the second quarter for the first time in more than four years, and the country returned to debt markets in April for the first time since 2010.

“If you take the glass-half-full view, then bringing the election forward is a positive,” said Dimitris Dalipis, who helps oversee about €600mn ($743mn) at Alpha Trust Mutual Fund Management in Athens. “We would have to face it anyway, so why not get it out of the way? After the selloff, there will definitely be opportunities in Greek assets. We are not selling.”

But others are, and across asset classes. The price of Greek three-year notes, sold in July as part of the nation’s reintegration into bond markets, fell to a record.

That pushed their yields above 10-year rates for the first time, a sign that investors are more concerned about shorter-term crises than the longer-term outlook.

The nation’s corporate bonds also slumped, with electricity distributor Public Power Corp and Hellenic Telecommunications leading declines on Bank of America Merrill Lynch’s euro high- yield index.

“People are just getting a lot more sanguine about progress in Greece and today was a rude reminder that things have been off track for some time,” BGC Brokers’ Ingram said yesterday from London. “It’s going to be a very challenging investment environment in 2015 overall. Why would the ECB be considering doing QE in the first place?”