Just over a year ago, we suggested you might buy the Greek stock market.
Back then, Greece was in the middle of a hotly contested-election. A euro exit looked only a matter of weeks, if not days, away. Yet Greece has hung in there, helped by a combination of voting the right' way, along with the promise by European Central Bank boss Mario Draghi to save the euro.
This has been great for Greek bonds and shares. Ten-year borrowing costs have dropped below 10% for the first time since October 2010. The stock market has also soared by 80% since then.
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But the crisis may be rearing its ugly head yet again. Amid the recent turmoil, the market in Athens is down 20% from its recent peak, so technically it's back in a bear market.
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The Greek crisis rears its ugly head (yet again)
Major stock markets around the world have been hit by fears that quantitative easing (QE) in the US might taper off.
But the Greek stock market has done particularly badly. As well as the general worry over the end of QE, Greece has had a few local problems.
Attempts to privatise a major state gas supplier a key part of Greece's strategy to tackle its huge debts collapsed this week. And a sudden decision to close down the state TV network ostensibly to cut costs has created a huge backlash.
It hasn't helped that the European Central Bank (ECB) seems to have taken a step back from the markets too. In his most recent public announcements, Draghi has been very vague about taking any further action. He's also hinted that a eurozone recovery may even start by the second half of this year.
He isn't the only one. French President Franois Hollande told a Japanese audience earlier this week that: "What you need to understand is that the crisis in Europe is over,"
This is unadulterated nonsense.
Survey data on French and Germany has been a little better, that's true. But this doesn't extend to other problem' countries, especially Greece and Italy. Greek unemployment continues to set new record levels. In Italy, business loans, house sales and investment all continue to fall.
Capital Economics reckons the eurozone as a whole will contract by 1.5% this year, a much bigger fall than the 0.6% the ECB is crossing its fingers for. It's also clear that the euro needs to fall to make exports competitive, especially given falling demand in China, and Japan's yen-hammering actions.
The ECB will have to act
But the good new for Athens is that the pressure is building on Brussels to turn on the printing presses. The International Monetary Fund (IMF), a key player in the Troika (the eurozone bail-out committee), is notorious for taking tough stances on cutting spending. But it recently did a huge U-turn, admitting that spending cuts alone will not work.
The IMF's implied solution is more haircuts for investors. But this will be very tough, because UK law backs the bonds. As a result, a small group of hold-outs, such as hedge funds, would have the ability to veto any deal, leaving monetisation as the only solution.
More importantly, matters may come to a head with Italy too. At the moment the government in Rome depends on support from Sylvio Berlusconi and his party. However, Berlusconi is attacking it for being too ready to embrace austerity. He's demanding that they either get the ECB to act, or quit the euro. The unspoken threat is that he will pull his support if they don't.
Clearly, the last thing the ECB wants is another election in Italy that could put an anti-euro party in power. The idea of Greece voluntarily dropping out of the euro is one thing. Italy is quite another if it left, the continued existence of the euro would be nigh-on impossible.
How to buy into cheap eurozone markets
In short, the high chance of more ECB intervention once things get close enough to crisis point is one key reason to buy into Greece as it falls. But another big factor is that the market remains very cheap, even after the most recent surge.
As we've pointed out before, the cyclically-adjusted price/earnings ratio (CAPE), which compares the current price to average earnings over a ten-year period, is one of the better ways to value a market. That's because it filters out the effects of the economic cycle.
At the moment, Greek shares trade at a CAPE of just over three. That makes Greece one of the cheapest markets in the world. By contrast, France, Germany and the UK have Capes of 12, 13 and 14 respectively. The US S&P 500 is over 20.
Another measure to use is the price-to-book value ratio. This measures share prices against net assets in effect, comparing the price of shares to what you could theoretically get for them if you liquidated all their assets. Again, Greek shares look cheap, selling at a P/BV of 0.88. If you look at 2014 valuations, the discount widens to nearly 50%. That's a bargain when you consider that French and German companies trade at a premium of 19% and 50% respectively. The easiest way to buy into Greece is through the Paris-listed Lyxor Athens ETF (Paris: GRE).
If you think Greece is too risky, you might want to try Italian shares instead through iShares FTSE MIB (LSE: IMIB). While the MIB index is bit more expensive, it still only has a CAPE of 7. Past research suggests that you will do very well in the future from buying markets that have fallen to that sort of level. And on price/book, Italy is on a very cheap-looking 0.78.
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