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Greek stocks are cheap – but there’s a reason

On the face of it, Greek stocks are trading at bargain prices. But scratch the surface, says Bengt Saelensminde, and you'll get a nasty surprise.

The first sign that things weren't good in Greece came back in 2010, when union protests in Athens flared into riots. And Greece has had a tough old time since then. But the scary thing is, I'm seeing signs that the worst isn't yet over for Greece.

Today, I want to show you an investor ratio that says something dramatic is going on in Greece. Either Greece offers the best value stocks in the whole world, or something more sinister is hidden in plain view.

The figures don't stack up

I'm in thrall to the humble price earnings (p/e) ratio. Though it has limitations, it's a good barometer of value. It's always a very good place to start.

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Moreover, when we invert the p/e (divide earnings by price instead), we get another great ratio. And that is the earnings yield. It tells us how much a company makes in earnings for every pound (dollar, or whatever) invested at the current market price.

Now, I look at p/e ratios for businesses, stocks, sectors, and even countries all day long. And certain sectors and countries always stand out. Regular readers will know that I like Russia if nothing else, because it trades on a piddling six times earnings.

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That sort of value' can forgive many of the Russian market's less savoury characteristics.

Greece stands out too. Trading on a stingy five times earnings, it's among the cheapest stock markets in the world.

Let's invert the ratio to get that earnings yield. This will put the five times figure in perspective for you. One fifth equals 20%. That means, if you invest in the Greek stock market, then on average, the firms you invest in will make earnings of 20% on your investment.

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Wowser! Who said you can't earn decent money these days? And if that surprises you, then you may be even more surprised to learn that even on a p/e of five, the market is actually up nearly 50% from its summer lows!

So it's no wonder savvy investors piled in during the summer. That's despite the fact that during the summer MSCI (that put together the global indices) downgraded Greek stocks to emerging-market status.

While the p/e ratio and earnings yield are a really useful place to start, they're certainly not the be all and end all. There's another regularly quoted figure that suggests something is very, very wrong with the Greek stock market and probably with Greece itself.

Dangerously curious

So, on average, companies' earnings are about 20% of what investors pay for their stock.But, here's the thing. These companies are only paying out dividends equivalent to 0.6%! Yes, that's nought point six percent.

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Remember last week, I was talking about the insurer Amlin and reinsurer CATCo? Both have suffered horribly over the last couple of years. Amlin lost 30p per share in 2011, and yet maintained a 23p dividend. That's equivalent to a yield of 5%. Over the last couple of years, CATCo paid a similar yield despite losing money in both years.

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What does this tell us? Well, to my mind it says that directors believe that earnings will normalise over coming years. By maintaining dividends during tough times, they signal their own confidence that everything is on track for better times ahead. This is what investors want to see.

Now, let's consider Greece. Quite frankly, I can't remember seeing a market generating so much income, yet paying out so little. Sure, an individual company may have a habit of not paying generous dividends.

It may be reinvesting profits in growing the business, or it may be for tax reasons. I'm sure many stocks that make up the Greek exchange have their reasons for keeping a tight hold of earnings. But for the market as a whole to pay so little is very strange.

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What does this tell us about director confidence in Greece? Put plainly, it says that Greek companies don't expect earnings to pick up in the future. It says that market trades on that rock bottom five times earnings for a very good reason.

Confidence is shot

Greek prime minister Antonio Samaras recently warned about reform fatigue. While the likes of Angela Merkel boasts that things in southern Europe are getting better, I think we should focus on what we can infer from the numbers.

Greek unemployment is bordering on 30%, and you can double that for youth unemployment. And we've just seen how little confidence Greek companies have in their own future.

Yet the country is still pushed by the Troika for more austerity cuts in its 2014 budget. Samaras warns: "You don't climb to the top of a mountain vertically. You ascend from one plateau to another. You catch your breath, you let your people appreciate your achievements, then you set your next target and you proceed to the next plateau."

Do you dive in anyway?

The European crisis seems to have gone into hibernation. This month's European Central Bank rate cut disturbed the slumber somewhat. It was a gentle reminder that southern Europe is still in a depression. No matter what the politicians tell us, we would do well to remember that social tensions are still high. I mean, with the sorts of unemployment rates reported, how could they not be?

There's no doubt that Greek stocks look cheap, even despite a 50% rally. I don't blame anyone for getting excited about a market trading on just five times earnings ie, a 20% earnings yield. But please, be realistic. All you'll get from these stocks is a trifling 0.6%. And surely that tells us something rather disturbing.

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