As Greece tackles its structural challenges, value investors return

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Value investors are returning to Greece, hopeful that if improving macro economic conditions persist, the coming year will prove a major boost to Greek small cap stocks.

Uncertainties certainly persist: the government has still to agree a post-bailout strategy with the Troika of lenders (made up of the International Monetary Fund, The European Commission and the European Central Bank). There is an estimated EUR 1 billion shortfall in Greece’s proposed 2018 privatisation programme (which may impact personal tax and VAT measures), and an election cycle is set to begin soon.

But there is growing evidence of a widespread economic recovery and a large reduction in country risk due to more positive relations with international creditors. Ratings agency Standard & Poor’s has upgraded Greece by a notch to B with positive outlook and for the first time in the decade since the global financial crisis, January saw monthly inflows into Greek domestic mutual funds.

A sustained recovery would be extremely supportive to smaller companies, which are largely overlooked by foreigners who go for the big stocks. The New Europe strategy looks more closely at smaller companies which are better known by local fund managers. The valuations in this space are still reasonably cheap and illiquid, so it does not take much to move them higher.

The New Europe strategy is committed significantly to the market, with 25-30% invested there. It is a big exposure but the managers have been on the ground in Greece for many years. Across central and eastern Europe, this is where one can now find the most opportunities. Larger stocks seem fairly valued but it is an excellent stock picker hunting ground, with small caps cheap and orphaned.

The strategy invests in a differentiated, bottom-up, value portfolio that is not at all quick or easy to replicate and a 100-200%+ upside can be expected in several holdings.