Morgan Stanley: Greece is the first investment choice

"For Greece, we maintain the overweight recommendation, as it is the best performing equity market in the world this year and there is high scope for the continuation of its outperformance," explains the bank.

Additional factors further supporting the outperformance of Greek equities and the MSCI Greece index are strong and resilient macroeconomics, achieving investment grade, the reduction in the cost of capital and the risk premium of Greek equities relative to Europe and developed markets.

Investment grade

In the analysis of the American investment bank, the dominant element is the investment grade. "A reduction in the Greek cost of capital (CoE) from 11.7% which is currently close to 9.4%, would mean a potential upside of +32%. This may be only a theoretical exercise, but it provides the size of a possible re-evaluation of Greek shares, in the short term", explains the American house.

The bank's economist supports the view that Greece will be able to reach investment-grade status from three agencies in the first half of next year, but there is a risk of an earlier upgrade if growth surprises and fiscal consolidation takes place at a faster pace than what the bank provides. An upgrade of Greece to investment grade in the coming months could support the current momentum in Greek stocks, as equity markets tend to start moving higher about eight months before the first rating.

Growth

On the macroeconomic side, the recovery of the Greek economy continues, with the chief economic analyst for Greece predicting that the domestic economy will continue to outperform the euro zone both this year and next.

Tight monetary policy is likely to weigh on the economy, but investment in Greece should continue to be supported by the implementation of the RRF program and record foreign direct investment inflows. On the political side, if New Democracy shows a result similar to that of the first round of parliamentary elections, it would mean it would win 180 seats in parliament and the possibility of forming a one-party majority government.

GDP growth for this year will be 2.5% and 2.2% in 2024. The macroeconomic course and the high performance of the MSCI Greece index have favored the positioning of foreign investors in Greek shares, which has increased in recent quarters. Passive fund managers investing in emerging markets, although with increased positions, are overall still slightly short on Greek equities.

Earnings dynamics

From there, the positive earnings momentum, especially for the banks, continues. The MSCI Greece index is the best performing market among emerging and developed markets, helped by positive revisions to earnings per share. Morgan Stanley sees further upgrades for 2023 and 2024, albeit at a slower pace. Greek stock valuations remain cheap in absolute and relative terms, with discounts remaining. The market is still trading at a deep discount to emerging markets and Europe. On a relative basis, MSCI Greece's discounts against emerging markets and Europe remain high at -28% and -31% in terms of P/E valuation for the next 12 months.