Jefferies: Greece is leading by Example – Bullish on stocks

“Greece rewarded our faith in its economic turnaround as tourist arrivals YTD breached new highs, helping to bolster the positive current account and earnings. A strong nominal boom in 2022 will be overshadowed by a shallow slowdown (recession) in 2023. However, imbalances are growing – surging inflation (12%) and a deep TARGET 2 difference. We remain Bullish.

Greek nominal GDP has been in the high teens as the economy belatedly ‘reopened’ to tourism. The economic momentum has underwritten an impressive rise in earnings and sales revisions for 2023. Output has returned to pre-pandemic levels. In fairness, coincident indicators appear rosy with business confidence rising (Sept., 105.1), industrial production firm (Aug, 3.9% y-y) and capacity utilization rates above trend (Aug., 75.9%). However, the manufacturing PMI (Oct., 49.7) hints at the forthcoming slowdown with new orders slipping as higher selling prices dampened demand.

Employment skidded further amid a sharp decrease in the backlogs of work. In fairness, Greece is one of the few economies we cover that has actually been undertaking reforms. The latest IMF consultation review (June) highlighted that ‘reforms progressed in several areas, including digitization, privatization, improving the fiscal policy mix, and bank balance sheet repair. Greece completed the early payment of all outstanding IMF credit in April, which terminates the Post Financing Assessment’. Indeed, the IMF ‘commended the authorities for the rapid reduction of non-performing loans in major banks and for their commitment to tackle the remaining challenges to enhance financial resilience’

‘Deflation, the bane of the Greek economy over the past decade, has perversely moved into an inflation problem (CPI 8.9%, Mar.) and in turn the current account has deteriorated. Although 2022 economic forecasts have relapsed (3.2%) from earlier optimism, Greece officially opened its doors to international tourists from 1 March. The growth in banking retail deposits is stunning and a huge vote of confidence in the economy.’

Looking ahead, the biggest challenge is the energy shock caused by the Russian invasion of Ukraine. As Jefferies reports, the country has made significant progress in its energy transition, with the Greek electricity system running entirely on “clean” renewable energy for the first time earlier this month.

It points out that Greece has been a supporter of the cap on gas prices within the EU and windfalls. To date, it has enacted policies that have allocated funds to reduce energy taxes, transfers to vulnerable groups and business support that are planned to amount to around 5.7% of GDP (€10.5 billion, source: Bruegel ).

Bullish on stocks

As concerns stocks, Jefferies notes that while the equity market is bathing in positive earnings revisions, the market has begun to look a tad expensive versus bonds. Equally, some of the macro factors are still quite imbalanced. We retain a Bullish rating on Greece.