Tracking Greek stocks, the Global X FTSE Greece 20 ETF (Amex: GREK) has been the top performing (non-leveraged) equity ETF this month-rising over 30% on news of an election victory by the eurozone-friendly New Democracy party. Other factors in the jump were short covering, and promises by central banks to intervene should financial turmoil erupt.
GREK could climb further, but at this point I don't like the margin of safety. The coalition government, with a majority of just 179 of the 300 seats in parliament, still faces some daunting challenges:
- Renegotiation of the terms of the bail-out agreement (Germany against concessions).
- Stiff opposition to austerity and structural reforms from the public and vested interests.
- A deep contraction developing in the economy, including youth unemployment of near 50%.
An exit from the eurozone remains a strong probability. A recent report by Citigroup concluded that the chance of Greece leaving within the next 18 months was 50% to 75%. Sure, central banks may inject liquidity into the financial system when the departure comes, but Greek stocks would still take a hit due to the devaluation effect of switching to a drachma that will be worth considerably less than the euro (Citigroup estimates 60% less).
This is the margin of safety that could tempt me: Greece leaves the eurozone and gets its own currency. The Greek ETF would then be a better buy, based on the export boom that would result from a having a flexible currency. Such an export boom is a more likely way than the current course for Greece to solve its debt problems.
The Greek ETF is small ($3.7 million in assets) and thinly traded (the 13% jump on June 14 took only 64,000 units). This means there will be a lot of volatility. Also, some investors may not like that a third of its weighting is in financial stocks, but presumably central banks will not allow the currently weak state of the European and world banking systems to snowball into a systemic collapse.