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Greece, the Newest Emerging Market, May Be a Hot One


Crises tend to produce great buying opportunities.

Prospects for emerging markets have gone from bad to worse over the past few weeks. The world investing establishment is gripped, rightly or wrongly, by the conviction that the US Federal Reserve Bank plans to ratchet down its massive US bond-buying soon. That will push up the interest rate on T-bills, make a range of alternative investments less attractive by comparison and, more to the point for emerging-market equities, lift the dollar relative to most second-tier currencies.

Since currency is destiny to a large extent when buying stocks overseas, investors have bailed out of an emerging-market space that was already underperforming the US market. The popular iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM) has dropped 10% in the past month, wiping out all its gains over the past year.

But there is one potential bright spot for the markets of the developing world: Greece. Yes, Greece. The long-suffering cradle of Western civilization endured a fresh humiliation last week. Global index referee MSCI demoted it from developed to emerging market, citing anemic valuations and various rickety practices on the Athens Stock Exchange – the first such relegation in financial history. The same day, the Greek government shut down the national broadcasting company as an extreme exercise in austerity.

But whatever you call it, Greece has been one of the best investments in the world over the past 12 months. If the idea of making money in a country whose economy has shrunk constantly for the past five years and where the youth unemployment rate is two-thirds sounds crazy, think again. Greek stocks and bonds were both priced for a default and expulsion from the eurozone that didn't happen, and they have readjusted dramatically. The Global X FTSE Greek 20 ETF (NYSEARCA:GREK) has gained more than 50% in value since June 2012. Yields on Greece's 10-year sovereign bonds, which peaked at 48.6% in March 2012, have plunged to about 10% now, returning wads for those brave enough to buy.

True, both markets have sold off sharply as the latest global risk-off mood took over the past month. The Greek stock market is down 20%, sovereign yields have bounced back up by 150 basis points. Is that a dead-cat bounce succumbing to gravity or a buying opportunity before the next re-rating upward?

There are reasons to go with the more optimistic answer. Greece's long, agonizing recession may finally end next year. The International Monetary Fund is expecting growth of less than 1% -- not great, but better than 5% shrinkage this year. The government of Prime Minister Antonis Samaras is overachieving on its fiscal austerity goals: The budget deficit for January-May was just one-quarter of its expected level.

That has put Greece's paymasters -- the "troika" of the IMF, European Union, and European Central Bank -- in a more dovish mood, and made the likelihood of another debt write-off next year more likely. A recently-leaked internal IMF document acknowledged "mistakes" on the Fund's part that led to more dire consequences than expected from the cutbacks and tax hikes imposed on Athens over the past several years.

The real Greek economy is emitting some modestly bullish signs, too, particularly the vital tourist industry, which contracted by 5.5% last year. Hoteliers are expecting a rebound this summer thanks to a cessation in strike activity and cost-cutting that has made a Greek vacation 40% cheaper than pre-crisis, according to the leading trade organization. Rival destination Turkey's bloody riots, conveniently timed for the opening of beach season, should also lift Greek bookings.

And Greece does not have one problem that most other emerging markets have: a thinly traded currency in retreat against a presumed post-QE dollar. You may recall that Greece and the euro have stuck with each other despite many calls from the peanut gallery for divorce. The euro has held like a rock against the greenback this year. The Brazilian real, to cite one major EM currency, has slid by 8% since March.

Of course, it could all go horribly wrong again for Greece. But crises, and the media hyperbole that comes with them, tend to produce great buying opportunities. Ask anyone who bought Russian shares in 1999, Turkish stocks in 2002, or just about anything anywhere in 2009. Now that Greece has been forced to embrace its inner emerging market, it could thrive.
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