Greece ETF Needs A Shot Of Confidence
Over the past year, none of the exchange-traded funds tracking the PIIGS economies have traded higher. In some cases, the losses incurred by these single-country ETFs are severe, but none are as bad as the Global X MSCI Greece ET (Global X Funds (NYSE: GREK)).
GREK, the first and only ETF dedicated to Greek stocks, is down 32.4 percent over the past year. That is 800 basis points worse than the iShares MSCI Italy Index (ETF) (NYSE: EWI), the second-worst PIIGS ETF of the past 12 months. That is saying something, because Italy and EWI are fraught with problems concerning investors.
As non-performing loans (NPLs) creep higher, investors mulling a stake in Italy ETFs or other Italy vehicles are pondering when reforms aimed at righting the banking sector there will be implemented and how long it will take those reforms to have a noticeable, positive impact.
Italy's most recent NPL plan is not reminiscent of TARP during the financial crisis in that the country isn't looking to sell bad loans. However, complexities surrounding Italy's efforts to deal with its NPL crisis could limit participation by some of the country's banks.
There are problems aplenty for Greek banks, too, and that is problematic for GREK because the ETF allocates nearly 39 percent of its weight to bank stocks. That is more than double GREK's second-largest sector weight, consumer discretionary.
“Greek authorities are likely to want to see further improvements in investor and customer confidence before capital controls, introduced in June 2015, are materially eased at Greek banks, says Fitch Ratings. In our view, the economic and political environment remains fragile and confidence has not yet returned to the financial system,” said Fitch Ratings in a recent note.
Fitch is not impressed with Greek banks, which represent four of GREK's top 10 holdings. The ratings agency's standalone viability rating on Greek banks is “F.”
Pressure on Greek banks, a lingering theme over the past several years of financial struggles, make GREK volatile relative to other single-country emerging markets ETFs. For example, GREK's standard deviation of 39.3 percent is high compared to diversified emerging market ETFs and even some Latin America ETFs.
“Recapitalisations mean that the credit fundamentals of Greek banks progressed significantly since June 2015 and capital controls also protect liquidity in the system. The sector as a whole is still heavily reliant on Eurosystem funding, largely in the form of emergency liquidity assistance (ELA) channelled through the Bank of Greece. But in June 2016, the ECB reinstated a waiver enabling it to accept Greek public sector debt as collateral to access regular refinancing facilities. We estimate that Greek banks could replace around 7 percent of their ELA funding with ECB borrowing; while this is not a significant amount, the banks will benefit from it being a slightly cheaper form of funding,” added Fitch.
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