Greek Week - Greece From the Bottom-Up
Most of the
financial reporting about Greece has been from a top-down prerspective. It
has not been pretty to say the least. But I’ve always been a
bottom-up guy. I’ve also seen how negative news can lead to cheap equity
valuations that actually decrease the risk of losing money.
I also got sick-and-tired of hearing what seems
to be secondary reporting.
So I went
there in mid-July 2012.
“Be greedy when others are fearful”, Warren Buffet
But I had
to go. The reason was that Greece reminded me of Indonesia and SE Asia
between 1997 and 2002, which is better known as the Asian Financial Crisis.
Negative GDP growth. Protests in the streets. Political confusion. Plunging
stock market.
In
retrospect that was an ideal time to invest. Since the depths of 1998 all
SE Asian stock markets have risen substantially. More importantly
the structural changes made in the depths of the crisis led to a more
sustainable economic and political situation. Indonesian and most of SE
Asian economies are growing, and most of the equity markets are close to all-time
highs.
But it is
not only SE Asia that may be a somewhat valid comparison. I was told that
others, mostly US-based deep-value managers, are poking around Greece.
They are comparing present day Greece to South and Latin American markets after
they had undergone their own financial crisis. As Mark Twain is believed
to have said, “History doesn’t repeat itself, but it does rhyme”.
The chorus
of negative news and uncertainty surrounding Greece seemed to reach a crescendo
just before the June elections when what was considered to a far-right party
was polling high. I quickly bought the US listed Greek ETF (GREK) a few
days before the elections as this seemed to be the point of maximum uncertainty.
Timing was lucky and the GREK rallied 30% soon after. I made enough
paper-profits to almost pay for the trip.
Greek
markets were, and remain, inexpensive. Several articles noted that Greek
equities were the least expensive in the world on several valuation
metrics. One report from July 2012 valued Greece at 3.6x long-term earnings, almost
one-third the valuation of the next cheapest market (Belgium at 9.1x). Another noted that Athens listed companies were amongst the cheapest in the world. Other articles looked at the situation from a behavioral finance angle and came to a
similar conclusion.
At those
prices I thought that one stands a much lower chance of a permanent loss of
capital than in 2006 when the Athens market hit its all-time high.
I also think that over the long-term buying a piece of a quality company at
these valuations is less risky than buying something more expensive.
Two books
also helped form an investment case for my trip and for subsequently pulling
the trigger. The first one is “This Time is Different”, (Carmen Reinhart,
Kenneth Rogoff). This book looks at financial disasters over the last eight
hundred years and comes up with observations on how these tend to unfold.
An earlier read, “Thinking, Fast and Slow” (Daniel Kahneman) helped me
recognize and deal with my own emotions that had kept me on the sidelines from
other market bottoms. Both are highly recommended. (Although an
investment contact here in HK has issues with the Reinhart/Rogoff book as they
seem to have left out some financial crises).
“It’s All Greek to Me”, Anonymous
My goal in
going to Greece was to find 2-5 quality companies. Companies that I felt
comfortable owning shares of for the next 3-5 years - or even better forever. I also did not want to spend much time and effort monitoring the
investments for two reasons. Keeping up to date would be difficult, as we
just don’t get much Greek news-flow in Hong Kong. Secondly, and most
importantly, I wanted to sleep at night.
Readers
should bear in mind that before March/April 2012 I knew almost nothing about
Greece, its economy, politics, stock market, listed companies, etc. I still
don’t know much. Most of my career and interest has been looking at
emerging Asia. This was my second time to
continental Europe, my first time in Greece, and the first time analyzing
anything in Europe.
My only
real advantage was that I had lived through a similar situation. I also had the
advantage of being outside of the storm and disinterested.
I can
only imagine the mood in Athens in May/June 2012 as being very bleak. The
FTSE/ATHEX 20 index had fallen over 40% in the previous four months. And
this was after an 88% decrease from its October 2007 index high.
According to figures from the World Federation of Exchanges, between October
2007 and May 2012, the value of all companies listed on the Greek exchange fell
from US$270b to US$26b. This put the total value of all 286 companies
traded on the exchange at about 1/20th the value of Apple Inc.
(APPL).
I also had
no way of buying Greek equities. My “global” broker sold its Athens
operation just as I became interested in Greece. I interpreted this as
another buy signal. The same broker shut-down most of its SE Asian
research offices close to the bottom of the Asian Financial Crisis, and just those before those markets entered a
multi-year bull-run.
It would
have been easier not to go to Greece, but there are not many choices outside of
Athens and, surprisingly, very little information on Greek companies and
businesses. Outside of Greece domiciled shipping companies listed in the
US and UK, non-European investors are basically stuck with three choices - the
Greek ETF (GREK), Coca-Cola Hellenic (CCH) and National Bank of Greece (NBG).
“…the crisis occurs at the end of the problem – not the
beginning. The crisis actually initiates the process of repairing
whatever problem created the crisis.” Frederick K. Martin, from ‘Benjamin
Graham and the Power of Growth Stocks’.
My Athens
trip was arranged very similar to investment trips I took when I was first
looking at emerging markets in the early 1990s (Jakarta, Karachi, Mumbai, Colombo,
Shanghai). About half of my visits were with the companies and the other
half with anyone who could tell me anything about leading corporate
personalities, listed companies, etc. This included journalists,
stockbrokers, investors, advisors, taxi cab drivers, waiters/waitresses,
etc. I was also helped by fellow CAIA professionals in Athens. I’m a big
fan of the CAIA program and try to meet other CAIA members/candidates when I
travel.
I came away
from Athens relatively impressed with the place. Life is tough there, the
average Greek is having a difficult time and many are having to work harder for
less money. Former civil servants and professionals are driving
taxis. Full-time limo drivers are working seven-days per week instead
of four or five. The rate for independent financial analysts seems
to have halved. Many professionals are looking abroad for better opportunities.
However
virtually everybody I talked to said that the current system is not working and
things had to change. I also felt that many realised things were
unusually good during the last decade or so and that the current status quo is unsustainable.
There was
also the feeling that Greece is falling behind its regional neighbors.
And that this is a blow to their national pride. For instance, the country’s
traditional rival, Turkey, is doing well. According to the World Bank,
the Turkish economy grew by 9.1% in 2010 and 8.5% in 2011. It stock market was
(and is) trading close to an all-time high. Greece’s economy fell by 3.5%
in 2010 and a further 6.9% in 2011 and its stock market has given up many years
of gains.
I was also
told that several poorer and less advanced Balkan countries are more business
friendly than Greece. Supposedly in one of these, citizens can form a
company over the Internet in a few hours. But in Greece it is an arduous process
that few attempt. I was told that it takes considerable effort, time and
bribes to secure a corporate license. (This has supposedly been
reformed).
But Greeks
also want to stay within the EU and I got the sense that many citizens realize
that they need the financial discipline that EU membership entails. They
polled by overwhelming margin – something like 70% I was told - to stay in the
Eurozone and EU. Several people told me that Greeks want to see more
European involvement in their government. I got the impression that they
acknowledge that something is wrong, they can’t seem to fix the system, and
that they collectively feel the need to let an outside and more powerful entity
to make and enforce the necessary changes.
The analogy
here, at least to me, is China’s December 2001 WTO membership. This gave
Beijing technocrats outside leverage to change policies that lead to faster
growth and development.
But bear
in mind that I have no particular insight beside my week of talking to as many
as I could. There is obviously more than a bit of wishful thinking here
as I suspect there are powerful interests that are doing very well under the
present system and will do as much as they can to resist change.
Familiar Structure
One thing I
like to look at before investing is ownership and control. This is
because in the Asian markets I’ve looked at most listcos are controlled by
either the government or one of several prominent business
families/groups. This means that minority investors have little-to-no-say
in the way companies are run, who is running them and how capital is
allocated. Knowing who is ultimately pushing the buttons and which person
or group respects minority shareholders helps me sleep at night.
Luckily, control of Greek listcos is very similar to S.E. Asia and other emerging markets I’ve looked at. In addition to a handful of large government controlled companies (OPAP, PPC, NBG), several business families control a large portion of the local market capitalization. This includes the Latsis, Vardinoyannis, Stasinopoulos, and Mytilineos families who control numerous companies, both private and public.
Many of
these are involved in more than one business line. For example, the
richest family, the Latsis’ and its Swiss based EFG group not only control the
largest Greek oil company (Greece Hellenic Petroleum), but also one of its
largest banks (Eurobank EFG), a property company (Lamda Development), and the
only listed REIT-type entity (Eurobank Properties). This does not include
the family’s shipping and related entities, or even its larger holdings outside
of Greece.
“The recession’s so bad that women now marry for love”,
Athens taxi driver quoting a newspaper article, July 2012
From the
top-down Greece looks bad. From the bottom-up things look much different.
I met with very switched-on management of some very good companies. I
stayed away from the banks as I never really like analysing them. I prefer to
stick to businesses that are simpler and that I feel I have a good chance to
understand. These include consumer goods, retail, energy, etc. Some take-aways:
- Strong companies are taking advantage of the economic downturn. One retailer I met stepped up their expansion program due to much less expensive and attractively located real estate.
- Some companies are doing well. One increased staff bonuses in 2011. They figured giving their staff more money at a time when it went further is a good way to retain key people. It could do this because it operates a very efficient plant with much of its earnings coming from outside Greece.
- Companies are also restructuring. OPAP, the state-owned lottery and sports betting monopoly, is in the process of selling 33% of itself. I was told that PPC, the state-owned electricity generator, might do the same.
- All companies I met have Euro-exit contingency plans or had made preparations. One thing that one does not read about is that management has had many years to prepare for a possible exit from the Euro. This has mostly been making sure loans are with Greek banks rather than non-Greek banks. Thus if Greece leaves the EMU, money borrowed from Greek banks will be repaid in the new, likely weaker, local currency rather than what most assume will than become a more expensive Euro. Thus an EMU exit will actually benefit companies with non-Greek derived earnings, as they can pay down likely cheaper local currency/Drachma loans with more dearer Euros, USD’s, etc. This is very different than the SE Asia financial crisis as rapid and adverse exchange rates left many companies with expensive currency mismatch between revenues and debt. (See example here)
I came away
from the trip feeling reasonably positive that things are changing. More
importantly I came away with about ten solid investment ideas, and put money to work in six later adding a seventh.
The best
part is that the market downturn made virtually everything inexpensive.
Quality, as well as non-quality companies, had been sold down to what I thought
were good entry levels. At those levels I think there was a decent enough
margin of safety to compensate for my lack of local knowledge.
I still
hold the Greek ETF. I added to my original position as the price started
to increase soon after the June election. The reason for holding the ETF is
that it provides exposure to solid companies that I thought were too expensive
at the time such as Coca-Cola Hellenic (CCH). It also gives me exposure
to the banks and financial companies that I could not bring myself to directly
invest in despite trading at 0.1-0.3x book value.
The result
has been good so far. After investing at the end of July the prices of my
individual picks rose between 5% to 90% or about 60% on average. So far
this is similar to the GREK ETF. So in a way my trip did not pay for
itself as I could have easily bought the ETF through my HK based
broker. The trip however did give me enough confidence to go
against the news flow and increase exposure. And with a multi-year time
horizon, I’m feeling confident that my picks have a good chance of doing well
and perhaps even better than the index.
It was also
a great trip. It was an intense learning experience and great fun
‘finding’ good/great companies at what I think are attractive valuations.
The people are nice and friendly; there is good food and drink; and quite a few
tourist spots to hang out at.
“I’ve got staying power. Just when you think it’s over,
I’ll come right back again”, “Staying Power”, by Barry White (from album of the
same name)
The market
and GREK ETF up some 70-80% since the June low. This should put the market’s long-term valuation at about 6-7x earning, still amongst the cheapest in the world. It is hard
to recommend something that’s gone up so far so fast, but at these valuations I
suspect a long-term buy-and-hide strategy should yield a decent return.
However,
one needs to be prepared for a potentially wild ride. Large risks remain and
prices could tank at some point. Between 1997 and 2002 the Indonesian
stock exchange rose and fell by over 30% no less than five times. And
this does not include currency changes. After rallying by 108% from its
March 1998 bottom it subsequently fell by 42% between July 1999 and March
2001. A long-term sustained rally did not commence until 2002, five years
after the Baht broke. But the rally was strong and long. Between October
2002 and Feb 2008, the Indonesian index increased by 5.4x. Indonesia is
now trading at around its all-time high having increased over14x since its
October 1998 low.
Disclosure. One should assume that the author has
a position in one or all of the stocks listed above.
