Greek Stock Rally Holds On as Traders Eye End of Bailout

(Bloomberg) -- The European equity market whose fortunes have swung on its country’s bailout dramas is holding on to a market-beating rally as the end of the aid program approaches.

Greece’s ASE Index has almost doubled since a low two years ago, posting the second-best performance among European peers in the past 12 months. While it has been boosted by fresh relief from the country’s creditors in the period, the advance could continue if the economy stays on its recovery path as the bailout program winds down this year, say traders and strategists.

Also in focus are Greek lenders’ stress test results in early May, which will show if they need more capital and, if so, how serious the problem is.

“The 2018 view from investors is -- just keep going, stick to the path laid out by the creditors, and we will reward that,” Dimitri Dardanis, head of institutional trading at Piraeus Securities SA in Athens, said by phone. “There is quite a bit of catch-up momentum, but there is also a fundamental reason underpinning it. An improving Greek economy means stocks listed here will perform better, be they banks or energy.”

Greece is finding its way out of a debt crisis that has erased roughly 25 billion euros ($31 billion) from the ASE’s market value since mid-2014, putting it roughly on par with that of Lloyds Banking Group Plc. The benchmark remains about 83 percent below its 2007 high. This week, the country moved a step closer toward exiting its rescue program, while economists expect growth to firm up this year and next.

Positive stress-test results for Greek lenders, which have borne the brunt of the country’s turmoil and comprise more than a fifth of the ASE, could usher in more gains for the benchmark. Piraeus Bank SA said this month it is well placed to fully eliminate emergency liquidity assistance in 2018, while National Bank of Greece SA eliminated its ELA funding in December, people familiar with the matter said last week.

“Investors may be holding back on Greek banks until they are done with their stress tests. There is also a big non-performing loan stock on the balance sheets which makes some investors nervous,” George Athanasakis, director of equity sales at Pantelakis Securities SA, said by phone. “But economic growth is positive for banks, so we are optimistic.”

Questions remain about the arrangement the country will enter into once it exits its bailout. Investors may want to see a monitoring program that allows creditors to ensure the government is sticking to its reform path even after Greece leaves their direct oversight, says Dardanis. Euro-area countries that received emergency loans, like Ireland or Portugal, have entered a regime called post-program surveillance, in which their finances remain under closer scrutiny until they repay at least 75 percent of the aid they received.

Luring Investors

According to Pantelakis Securities’ Athanasakis, the outlook for Greek stocks is bright regardless of the exit deal’s specific terms. He estimates the ASE could retake its 2014 highs in the next few years if the government continues with market-friendly reforms, including further privatization that should attract international investors. The benchmark is about 37 percent below its 2014 peak. It rose 0.6 percent on Tuesday, while the Stoxx Europe 600 Index was little changed.

Some foreign investors are backing the country’s shares already -- the Global X MSCI Greece ETF has seen inflows for seven straight weeks.

Still, equities in so-called peripheral European markets such as Greece have been especially vulnerable to broader market events in recent years. According to Piraeus Securities’ Dardanis, the biggest risks to the country’s rally are external shocks such as new elections in Germany, which could drive investor focus away from domestic improvements.

“Catch-up is still due on the Greek equity front,” Lyxor Asset Management strategists including Lionel Melin wrote in a note this month. “We like Greek equities best.”

©2018 Bloomberg L.P.

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