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Europe’s Former Pariah Could Be Headed for New Era: Taking Stock

Europe’s Former Pariah Could Be Headed for New Era: Taking Stock

(Bloomberg) -- Global equities may have posted big gains so far this year, but one market puts it in perspective: Greece. Once Europe’s underperformer, the Athens stock benchmark is up 46% in 2019, beating all other equity indexes worldwide. Now that the country has elected pro-business leader Kyriakos Mitsotakis as expected, the question is how far can the Greek stock market go from here.

Europe’s Former Pariah Could Be Headed for New Era: Taking Stock

The elections “will usher in a new era for Greece, and after a decade of distress, Mitsotakis will catapult the country toward full economic normalization,” says Cullen Thompson, chief investment officer at New York-based Bienville Capital, which owns Greek stocks. Markets have started to sense the change but are “vastly underestimating” its full impact, as the cycle turns more virtuous, he says.

Despite this year’s sharp gains, Greek equities still have a long way to go before reaching their 2014 peak. They’ve only recouped half of their losses suffered during the 2014-2016 slump.

Europe’s Former Pariah Could Be Headed for New Era: Taking Stock

It’s not just equities. Greek bonds have returned the most in the euro area this year. Yields had started falling way before Syriza’s defeat in the European parliament elections, but the fall has accelerated since then. Economic indicators are in green, manufacturing PMI is above 50, GDP is expected to rise 1.9% this year and 2.1% in 2020. Public debt exceeding 180% of GDP seems less of an issue now as ECB easing is crushing the yield curve, pushing investors to seek yields where they can.

The risk associated with the country has been vanishing fast. Greece’s 5-year credit-default swaps fell off a cliff to reach its lowest level since December 2009. It’s now near the point where the Italian CDS was trading at, just one month ago.

Europe’s Former Pariah Could Be Headed for New Era: Taking Stock

The gains in Greek equities are far from over, according to Thomaz Malavazzi, a managing partner at Helm Investment Partners in New York, which owns Greek shares. He sees in the recent rally only a rebound from last year’s price decline. “There is very little priced in regarding the shift to a pro-growth policy mix,” he says.

  • READ: Greece Ready to Turn the Page on Tsipras: Ferdinando Giugliano
  • READ: Europe Tamed a Populist Leader and Now He’s Paying the Price

Bank of America Merrill Lynch strategists also see upside potential from post-election political stability and reforms -- but with challenges. These include the safeguarding of fiscal targets, restoring the health of banks, and implementing structural reforms.
Continuous improvement in banks’ financial strength is vital, as financials account for about a quarter of the ASE benchmark stock index. Greek lenders have recouped most of last year’s losses, except for NBG. The FTSE/Athex Banks index almost doubled this year, with Piraeus and Attica even up 286% and 326%, respectively.

Normalization is still far away though. The Bank of Greece said the pace of bad-debt reduction isn’t sufficient to bring the non-performing loan (NPL) ratio close to the European average of 3.2%.

Europe’s Former Pariah Could Be Headed for New Era: Taking Stock

Malavazzi says banks will soon receive additional tools to deal with NPLs through systemic solutions proposed by the Hellenic Financial Stability Fund and by the Bank of Greece. Rising real estate prices are providing collateral for NPLs, benefiting balance sheets and future profitability, he adds.

“The worst is over,” Berenberg strategists write, adding that the mistakes of the past have been corrected and that the doom prophets have been proved wrong. As flows have been pouring into the main Greek ETF, perhaps the next worry for Greek stocks will be liquidity. Let’s not forget the entire value of the ASE is equivalent to the market cap of Adidas.

In the meantime, Euro Stoxx 50 futures are trading down 0.3% ahead of the open.

  • Watch stocks exposed to Turkey after Turkish President Recep Tayyip Erdogan unexpectedly removed the country’s central bank governor, causing the lira to slump more than 3%. Watch banks including Unicredit, BBVA, BNP Paribas. Also watch Vicat, Telia, DFDS, Rieter among others.
  • Watch the pound and U.K. stocks as U.K. Conservative Party members begin voting by post to choose Theresa May’s successor, with Boris Johnson set for a landslide victory over rival Jeremy Hunt, according to a YouGov poll. Meanwhile, some Tory lawmakers are attempting once again to stop the new prime minister from forcing a chaotic Brexit without Parliament’s consent.

COMMENT:

  • “Our cross-asset strategy team have downgraded global equities to underweight given a combination of poor expected returns, challenging fundamentals and worrisome leadership and seasonality. They now have their lowest equity weighting within their asset allocation product in five years. Regionally they prefer Japan and Europe over EM and U.S.” Morgan Stanley strategists write in a note.

COMPANY NEWS AND M&A:

  • Deutsche Bank to Slash 18,000 Jobs in $8.3 Billion Overhaul
  • Boeing’s 737 Max Loses First Customer as Flyadeal Goes to Airbus
  • Sodexo Sees Slower 4Q After 9-Mth Growth Beats Expectations
  • Julius Baer Names Philipp Rickenbacher CEO to Replace Hodler
  • BT Hires Credit Suisse to Seek Buyer for Spain Unit: Expansion
  • Air France-KLM Passenger Traffic Increases by 4.2% in June
  • BAM Lowers FY Pretax Margin View; Expects to Report 1H Loss
  • Baloise Real Estate Mgmt Launches ~CHF200m Capital Increase
  • Asos Considers 100 Job Cuts at London Headquarters: Times
  • Aston Martin CEO Woos Investors With Supercars at Goodwood Gala
  • Wasserman Media in Talks to Buy Lagardere Sports Unit: FT
  • TGS Second Quarter Net Revenue Beats Estimates
  • AB Science Says Phase 2/3 Trial of Masitinib in ALS Positive
  • Elis Agrees to Sell Part of Clinical Solutions Business in U.K.

NOTES FROM THE SELL SIDE:

  • Citi cut Tele2 to buy from neutral with few near-term catalysts to drive upside, while seeing hidden value in the European telecoms sector. Top picks include Vodafone and KPN, while Citi stays cautious on Telia and Sunrise.
  • The arguments that underpinned Merlin Entertainments recently going private are equally pertinent for Cineworld, RBC says in a note, keeping a top pick recommendation on the U.K. cinema operator.
  • Citi cut Akzo Nobel to sell (PT EU70), saying the company needs to rationalize its global footprint, with the current strategy to achieve 450bp margin uplift not feasible.

TECHNICAL OUTLOOK for Stoxx 600 index:

  • Resistance at 397.9 (May 2018 high); 403.7 (2018 high)
  • Support at 385.7 (76.4% Fibo); 381.1 (50-DMA)
  • RSI: 63.2

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

  • Resistance at 3,596 (May 2018 high); 3,687 (2018 high)
  • Support at 3,519 (76.4% Fibo); 3,412 (50-DMA)
  • RSI: 68.1

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

  • ADO Properties upgraded to buy at Jefferies; PT 46 Euros
  • Computacenter raised to equal-weight at Barclays
  • Deutsche Wohnen upgraded to buy at Jefferies; PT 39 Euros
  • Dios Upgraded to Hold at Handelsbanken; PT 77 Kronor
  • LafargeHolcim upgraded to equal-weight at Barclays; PT 50 Francs
  • Orsted upgraded to buy at Goldman; PT 700 Kroner
  • Pirelli upgraded to overweight at JPMorgan; PT 8 Euros
  • Red Electrica upgraded to outperform at RBC
  • Telefonica Deutschland upgraded to hold at Bankhaus Lampe

DOWNGRADES:

  • 3i Infra downgraded to underperform at Jefferies
  • Akzo Nobel downgraded to sell at Citi; PT Set to 70 Euros
  • CRH cut to equal-weight at Barclays; Price Target 33 Euros
  • Hapag-Lloyd downgraded to sell at Goldman; PT 30 Euros
  • HeidelbergCement cut to equal-weight at Barclays; PT 77 Euros
  • Inchcape downgraded to neutral at JPMorgan; PT 6.27 Pounds
  • Maersk downgraded to neutral at Goldman; PT 9,000 Kroner
  • Nostrum Oil & Gas downgraded to hold at VTB Capital; PT 50 Pence
  • Safran downgraded to neutral at Goldman; PT 143 Euros
  • Schroders cut to equal-weight at Barclays; PT 31.55 Pounds
  • Severn Trent downgraded to underweight at JPMorgan; PT 20 Pounds
  • Tele2 downgraded to neutral at Citi

INITIATIONS:

  • Celyad rated new outperform at Wells Fargo; PT 44 Euros
  • Diploma rated new neutral at Citi; PT 15 Pounds
  • Traton rated new hold at Jefferies; PT 27 Euros

MARKETS:

  • MSCI Asia Pacific down 0.4%, Nikkei 225 down 1%
  • S&P 500 down 0.2%, Dow down 0.2%, Nasdaq down 0.1%
  • Euro up 0.04% at $1.1229
  • Dollar Index down 0.09% at 97.2
  • Yen up 0.16% at 108.3
  • Brent little changed at $64.2/bbl, WTI down 0.1% to $57.5/bbl
  • LME 3m Copper down 0.2% at $5888.5/MT
  • Gold spot up 0.4% at $1404.5/oz
  • US 10Yr yield down 2bps at 2.02%

ECONOMIC DATA (All times CET):

  • 8:30am: (FR) June Bank of France Ind. Sentiment, est. 99, prior 99
  • 8:30am: (EC) Bloomberg July Eurozone Economic Survey
  • 8:35am: (GE) Bloomberg July Germany Economic Survey
  • 8:40am: (FR) Bloomberg July France Economic Survey
  • 8:45am: (IT) Bloomberg July Italy Economic Survey
  • 8:50am: (SP) Bloomberg July Spain Economic Survey
  • 10:30am: (EC) July Sentix Investor Confidence, est. 0.1, prior -3.3

* For a daily wrap on developments in European equity capital markets, click here

--With assistance from Vassilis Karamanis and Jan-Patrick Barnert.

To contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon

©2019 Bloomberg L.P.