Great calamity also offers great opportunity, it’s said. Investors have found, time and again (usually in hindsight) that the right thing to do in the throes of financial crisis is to buck the stampeding-herd mentality. If they’re fleeing, get in there and pick up the stuff they’re dumping at rock-bottom prices.
That tactic has often generated gorgeous profits for the brave of heart. If you bought Russian bonds during the crisis of 1998 at a fifth or even a tenth of their face value, you made a killing. Ultimately those bonds were paid in full. Advertisement
You don’t have to go that far back to find examples. Anyone who got into Israeli government bonds a decade ago has done brilliantly. Back then Israel’s situation, economically and defense-wise, looked awful. Things change.
Naturally, this go-against-the-flow approach has its faults. One, you must have strong nerves. Two, you must be prepared to lose money. Three, you have to be able to not cringe when that “rock-bottom” price at which you bought in drops a lot more in the following days. That happens during crises.
And fourth, not every crisis becomes an opportunity. Sometimes it merely remains a crisis. Then you discover that the fleeing, panicked herd got it right and you’re no lionhearted master of the green screen, you’re a chump stuck with radioactive financial assets. That, for instance, is what happened to anybody who got into Argentine bonds a few years ago.
If you can’t handle the loss, financially or emotionally, don’t get into “crisis” investments of this kind.
But if you can, here’s an idea in the Aegean Sea. Could opportunity lurk in the murk?
Greece is going through hard financial times. It’s running a Herculean budget deficit and may well default. As a result, the yields on Greek government bonds have risen sharply while Athenian share prices have tanked.
Speculation has been running rampant for weeks as to whether Greece faces financial collapse, and whether the euro bloc countries will rescue it.
None of this information is any help to investors trying to assess whether the crisis in Greece offers an opportunity. The investors must look at financial assets for which they can analyze potential risks and rewards in actual, naked numbers. That’s the only way to reach a reasonable decision on whether or not to invest.
Here are three possibilities for investing in Greek assets, each with a different risk/reward profile.
The first and simplest avenue is government bonds. The yield spread between Greek and German government bonds (which are considered safe as houses) has greatly widened in recent months.
Today you can find Greek bonds denominated in the euro, with a yield to maturity of 6.5% a year, compared with 3% to 3.5% for German government bonds. A surplus yield of 3% is nothing to sneeze at, but there’s risk involved. If the crisis in Greece worsens and the country defaults, bondholders will hurt.
A total loss of the entire investment is an extreme scenario. Even if the crisis is a bad one Greece should surely be able to repay some of its debt and to reschedule part of it. But you cannot dismiss this possibility.
As always when investing under conditions of uncertainty, no one can give you a hard-and-fast answer as to the merits of Greek government bonds. I wouldn’t bet the house, but putting some small proportion of a well-diversified portfolio into them might pay off.
Now we move to assets where the risks, and the potential payoffs, are higher: shares. If you’re willing to take your Greek adventure a step further, you might consider investment in a Greek bank such as the National Bank of Greece.
NBG has been around since the mid-19th century. It’s been listed on the Athens stock exchange since 1880, and in New York from 1990. (The Athens stock exchange was founded in 1876.) NBG’s stock has fluctuated violently in recent months. There are the problems of the banking sector worldwide in the last two years, the problems of Greece itself, and the fact that NBG, which operates not only in Greece but in eastern European and Balkan countries, among others, has suffered. Its share price is around 16 euros, almost double its level at the height of the crisis a year ago but still well below its 42-euro peak. Its present share price reflects a market cap of 9.7 billion euros, just 5% above its shareholders equity. For the first nine month of 2009 NBG presented return on equity of just 15%, which is low for it.
NBG’s risk/reward equation isn’t the same as that of bonds. If the disaster scenarios are not realized and Greece and eastern Europe gradually recover, then its stock could return 15% a year (buying into a bank achieving return on equity of 15% at roughly the same price as its shareholders equity should generate a return of 15% over time).
The risk is equally clear. If we’ve learned anything about bank stocks lately it’s that they can fell very, very low, and that a 150-year history promises nothing. You could lose your whole investment.
Coca-Cola Hellenic Bottling Company distributes you-know-what and other beverages in Greece and in 28 Balkan and eastern European countries. The Coca-Cola Company, headquartered in Atlanta, Georgia, owns 20% of its stock. It’s listed for trading in Athens and New York.
The company’s sales and profits grew steadily for years until the slowdown struck in 2009. For the first time, Hellenic had to admit to slowing sales and dropping profit. Investors responded predictably and today, its stock is half its pre-crisis level. (It’s also about double where it was a year ago.)
Hellenic’s pricing ratios are a profit multiple of 13-34 and enterprise value/Ebitda ratio of 7.3. For the sake of comparison, Coca Cola trades at a profit multiple of 20 and EV/Ebitda ratio of 13. True, the risks the global company faces are rather smaller, but that’s some gap. When the markets in which Hellenic operates rally, the company’s stock could perform well. Or the crisis in eastern Europe could continue, but at the company’s present share price there’s still a chance of handsome returns.
The author is the CEO of Psagot Compass Investments, and heads the foreign equity research department at Psagot.