By Natalie Weeks and Alexis Xydias – May 25, 2010
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Europe’s biggest investors say the risk of default by Greece make equities trading with the developed world’s lowest valuations too expensive to own.

Renaissance Asset Management said the Athens Stock Exchange General Index may fall more after a 30 percent slump in 2010 pushed its price to 8.6 times estimated 2010 profit. The earnings ratio, below the level where the Standard & Poor’s 500 Index began an 80 percent rally in 2009, is meaningless unless Greece cuts its deficit, Swisscanto Asset Management AG said.

More than $78 billion of market value was erased in Greece since October as a budget shortfall equal to 13.6 percent of gross domestic product threatened to boost loan losses and provisions at banks, which stood at a combined 991 million euros ($1.23 billion) for the country’s four largest lenders in the fourth quarter. Hellenic Telecommunications Organization SA and Titan Cement Co. dropped at least 18 percent after the European Union unveiled a $1 trillion bailout for the region on May 9 to bolster the euro. The currency fell last week to its lowest level against the dollar in four years.

“The perception among European investors is that Greece is still a risky market,” said Ben Hauzenberger, a Zurich-based fund manager at Swisscanto, which oversees $53 billion. His Euroland fund outperformed its benchmark by more than 3 percentage points in 2009, helped by investments in National Bank of Greece SA and Alpha Bank AE, the country’s largest- and third-biggest banks. “It’s very difficult to judge if it is too early to go in.”

Balance Sheets

The ASE’s price-to-earnings ratio is 33 percent below the multiple for the MSCI World Index of 23 developed markets. The gap isn’t attracting investors, who remain concerned Prime Minister George Papandreou won’t cut spending enough to prevent a default, said Colin McLean, who helps manage 650 million pounds ($937 million) at SVM Asset Management Ltd. in Edinburgh.

“There is a great likelihood of debt rescheduling or default in Greece, and that will cause some damage to balance sheets, so I don’t think there is obvious value there,” McLean said. “The economy itself will be suffering contraction over the next coming years.”

Under the EU’s Stability and Growth Pact, countries should limit deficits to 3 percent of gross domestic product or face fines. Greece forecast its budget shortfall will shrink to 4.9 percent in 2013 and fall below the EU limit in 2014. The nation’s economy will contract 4 percent this year, according to government and EU estimates.

Workers Strike

Greek workers staged the country’s fourth general strike last week and thousands of protestors marched to Parliament in Athens to block spending cuts that Papandreou must pass to qualify for an aid package from the EU and International Monetary Fund worth 110 billion euros. Three people were killed on May 5 as demonstrators set fire to a bank in the capital.

Regulators banned short sales on the Athens stock exchange on April 28 for two months after shares slumped and Standard & Poor’s Ratings Services cut the nation’s credit rating to junk status. The ASE has fallen 9.2 percent since then.

“We don’t hold Greek assets, and we consciously don’t,” said Adrian Harris, who helps oversee $1.5 billion at Renaissance Asset Management in London. “There will come a time when they will be attractive, but they are not attractive enough yet for the risk that is inherent. Greek banks carry the uncertainty of some sort of debt restructuring.”

Earnings Reports

Greece’s four biggest lenders are scheduled to report results this week. Bank of America Corp., based in Charlotte, North Carolina, cut recommendations on EFG Eurobank Ergasias SA and Piraeus Bank SA on May 19, and New York-based JPMorgan Chase & Co. followed May 25 with downgrades to “underweight” on all four stocks. Credit Suisse Group AG of Zurich lowered earnings estimates before this week’s releases while Nomura Holdings Inc. in Tokyo advised against holding Greek bank shares.

Shares of Bank of Greece, the nation’s central bank, have tumbled 24 percent since Dec. 31. Stoxx Ltd. announced yesterday that the stock would be removed from the Stoxx Europe 600 Index, the benchmark measure of the region’s equities.

Even after a “strong share price correction” in 2010, the risk associated with Greek banks is “unattractive,” JPMorgan analysts led by Paul Formanko wrote in a report, citing a “longer path to recovery,” fiscal measures that will hurt asset quality, increased funding costs, and the risks of capital requirements and of change in ownership structure.

The market declines have been big enough to persuade Panagiotis Kladis, an analyst at National P&K Securities, that there are bargains among Greek lenders.

‘Attractive’ Valuations

“Valuations are attractive,” said Kladis, who works in Athens. “However, we need some catalysts to see higher valuations, namely the proper implementation of the EU-IMF program, positive surprises in the budget deficit or government initiatives to stimulate growth.”

Greece’s finance minister said May 18 that the government reduced its deficit in the first four months of 2010 by 42 percent. The aid package for Greece foresees the budget deficit falling to 8.1 percent of GDP this year.

Hellenic Telecommunications, Greece’s biggest telephone services provider, said on May 12 that first-quarter profit fell 75 percent. Jumbo SA, the nation’s biggest toy and baby products retailer, a week later posted a 5.4 percent drop in nine-month net income, hurt by a one-time tax charge on the country’s biggest companies. Both businesses are based in Athens.

Less Construction

Titan Cement, Greece’s biggest producer of the building material, reported on May 17 that first-quarter net income rose 16 percent. The company, also based in the capital city, said it expects building activity in the country to drop as austerity measures reduce incomes.

Argentina’s Merval Index jumped 78 percent in 2002, the year following the South American country’s record default on $95 billion in bonds. The MSCI All Country World Index dropped 21 percent in 2002. The Merval increased sevenfold through 2007 as the default improved the government’s accounts and a devaluation of the peso boosted exports.

Renaissance’s Harris, who specializes in emerging markets and runs global funds for clients, says countries near Greece offer the same value with less risk. Turkey has $72 billion in international reserve assets, while Greece has $170 million, government and central banks data show.

“Would you rather buy assets from a country with billions of dollars in foreign reserves, or would you rather buy it from a country that’s struggling to meet next month’s repayment?” he said. “‘Developed market’ doesn’t mean lower risk anymore. As a trader, we’d rather be in Turkey than Greece.”

To contact the reporters on this story: Natalie Weeks in Athens at nweeks2@bloomberg.net; Alexis Xydias in London at axydias@bloomberg.net.

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