Greece’s quest to pass the next milestone on it bailout plan will get a hearing on Monday in Brussels at a meeting of EU finance ministers. Press reports suggest that the EU and IMF are still looking for about €9 billion in further austerity measures by 2018 to help plug a deficit. The Germans, however, appear willing to cut Greece some slack by delaying these measures for a few years to give Greece greater breathing room to deal with its refugee crisis. That crisis has hit Greece the hardest, because the country is the closest entry point for refugees, but its borders have been all but closed to refugees looking to make their way to other parts of Europe. The Financial Times reported on Friday that the EU was close to a deal with Turkey to stem the flow of refugees heading to Greece (and the EU), but the deal will probably face legal challenges. Greek officials are anxious to reach agreement on both the refugee crisis and the bailout program in order to ease the pressure on its economy and guarantee receipt of future assistance.
On March 1, Global X Funds, which (I believe) offers the only ETF focused on Greece’s equity market, announced that it has changed the name of the fund from the Global X FTSE Greece 20 ETF to the Global X MSCI Greece ETF. It has thus changed benchmarks from the FTSE/ATHEX Custom Capped Index to the MSCI All Greece Select 25/50 Index.
Whereas the FTSE Index invested in the 20 largest stocks in the Athens Stock Exchange, the MSCI Index allows for a broader representation of Greek stocks. Many of these stocks are smaller and less liquid, but the MSCI Index does have minimum market capitalization and liquidity requirements.
The most notable change to GREK was the decline in its investment in Coca-Cola HBC (CCH.L) from 22.1% of the portfolio on October 31, 2015 to 11.4% on March 4, 2016. Over that time, the value of GRK’s holdings in CCH has dropped from $69.7 million to $12.8 million, as the share count was reduced from 2.91 million to 0.65 million. (It should be noted that GREK’s total equity value has also fallen from $313 million to $223 million over that period.) With the decline in exposure to CCH.L, GREK has increased its exposure to other sectors, most notably the Greek banks, which currently account for about 30% of the ETF’s holdings.
Although Coca-Cola HBC is one of Greece’s greatest business success stories, it now serves the pan-European market. Years ago, the company relocated its headquarters from Greece to Switzerland and its primary share listing from Athens to London. It is still listed on the Athens Stock Exchange (ATHEX), but carries much less weight in the MSCI Index, which has a broader representation of companies that operate within Greece.
The decline in the weighting within GREK of Coca-Cola HBC makes GREK a riskier and potentially more volatile investment. CCH.L has outperformed the ATHEX significantly over the past several years. However, its inclusion in the Greek ETF does not seemed to have stemmed much of the decline in GREK during that time. GREK declined 39.7% in 2015, compared with the ATHEX’s 23.6% decline, but it has fallen 10.5% year-to-date, better than the ATHEX’s 12.4% decline.
GREK’s switch to the MSCI Index is good news for those investors who want more direct exposure to Greece, but will also probably serve (in the near-term at least) to attract investors with a shorter-term orientation and a higher tolerance for risk.
This year’s performance has roughly been in line with the broader market indexes in both Europe and the U.S. GREK bottomed on February 11 at $5.56 and has since rallied 28% to $7.12. It remains, however, well below its all-time high of $25.16 set in March 2014.
Accordingly, GREK will most likely outperform the broader market averages if the Greek government reaches an agreement on current issues related to its bailout program and the Greek economy shows further improvement in 2016. On Friday, the government reported that GDP declined 0.2% in 2015, which was slightly better (i.e. less) than expected.
Given press reports of the current state of negotiations, it appears that Greece will not reach an agreement with EU finance ministers at the meeting on Monday (tomorrow); but progress will probably be made toward a deal which could be announced in the coming weeks.
March 6, 2016
Stephen P. Percoco
Lark Research, Inc.
P.O. Box 1543
Linden, New Jersey 07036