Contra Guys: It can be advantageous to cast a wide – and global

Globe and Mail

5 days ago

How much of your portfolio is invested overseas?
This is an important question, especially in a year such as this one, when many European stock indexes are beating North American benchmarks, including the S&P/TSX Composite Index.
Though many Canadians are overweight in Canadian stocks, we remain true to our contrary roots and try to avoid home-country bias. Investing in our home market can have certain tax advantages, and avoids foreign exchange rate volatility, but it can also reduce diversification, increase risk and impact returns. Ultimately, it is a big world out there, and it can be advantageous to cast a wide net.
This is why we make a habit of investing in exchange-traded funds and equities that do business around the globe. One such ETF is the Global X MSCI Greece ETF GREK-A, which tracks the performance of the MSCI All Greece Select 25/50 Index. Here at Contra the Heard Investment Newsletter, we took a stake in GREK in October, 2015. Back then, the Greek financial crisis was rumbling into its seventh year and few investors wanted to touch the country.
The government had just negotiated its third bailout package, introduced capital controls and then-Prime Minister Alexis Tsipras had won a surprise re-election. These actions tempered the surging value of credit default swaps and yields on government debt, but the nation remained on the cusp of default. Gross domestic product had fallen from US$352.1-billion in 2008 to US$194.6-billion in 2015, the unemployment rate was around 25 per cent and the banking sector was on life support, as roughly 47 per cent of all loans were non-performing. To illustrate just how bad the Hellenic banking crisis was, during the peak of the 2008-09 U.S. financial crisis, America's non-performing loans were only 7.5 per cent.
Amid these economic depression-like conditions, the Greek stock market sank to one of the cheapest in the world and we took a stake. Not only was it inexpensive, but we figured the Troika (a decision-making group composed of the European Commission, European Central Bank and International Monetary Fund) would not let Greece fail. The Troika had already bailed out the country three times and, within the context of the European Union, Greece was too big to fail.
Once the ETF was in our portfolio, we practised patience. While corporate turnarounds take time, national ones can take even longer.
In 2023, I wrote about the Greek ETF for The Globe and Mail. At the time, I argued the ETF was still cheap and the country was performing well thanks to a series of reforms that had cut the national debt, streamlined regulations, reduced tax avoidance, digitized government processes and put the banks back on their feet.
Earlier: Greece's stock market is on a tear - and this ETF tracking it is poised for even more gains
Fast forward to the present day and the turnaround has turned into a growth story. Greece regained an investment-grade credit rating in late 2023, the country's debt-to-GDP ratio has fallen from more than 200 per cent to 153.6 per cent and it produced a budgetary surplus of 1.3 per cent of GDP in 2024. By contrast, the euro zone average was a deficit of 3.1 per cent.
The Greek government surplus is even more impressive given that most European countries have been spending just over 2 per cent of GDP on defence while Greece spent approximately 3.1 per cent last year. This should serve Greece well as the North Atlantic Treaty Organization alliance moves toward a new 5-per-cent target.
Aside from government finances, the rest of Greece's economy is doing well too. The unemployment rate has fallen to under 8 per cent, the household-debt-to-GDP ratio has fallen from nearly 67 per cent to 39 per cent since the financial crisis and the financial sector's non-performing loan balance now stands at under 4 per cent. The banks have done so well that they now account for more than half of the GREK ETF versus around a quarter a decade ago.
Despite all the success, Greece is not without risk. The debt-to-GDP ratio is still high, the nation continues to score poorly on the Corruption Perception Index despite recent advances and it has continuing problems with its neighbours in Turkey.
The legal system is also a congested and inefficient mess. According to the EU Justice Scoreboard, it takes Greek courts over 600 days to conclude civil and commercial cases. By contrast, Denmark takes less than 20 days and most European countries take around 100 days. This means it can take years for a trial to reach a conclusion – assuming there is no appeal. These timelines slow down business, drive away foreign investment and leave parties impacted by court cases in a state of limbo.
At its core, Greece faces poor demographics as well. The nation's fertility rate is roughly 1.3 births per woman, it suffered years of net emigration during the financial crisis and the median age, currently in the mid-40s, is climbing fast. This means that Greece's population, which peaked over a decade ago, is expected to fall in the decades ahead. Moreover, Greek society will get materially older; this will leave fewer working-age people to support retirees, health care infrastructure and pensions.
All in all, however, Greece has more going for it than against it, and the turnaround over the past decade has been a resounding success. The outlook is positive and the GREK ETF could rally much further. We recently trimmed our position in GREK for a 109.2-per-cent gain. Locking in this profit recouped our initial investment but leaves plenty of skin in the game to benefit from future price appreciation.
Today, GREK sports a yield of over 4 per cent and blends strong momentum with low stock valuations. These are excellent characteristics, especially when coupled with the underlying economic conditions.
Our plan is to let the ETF run, look for valuations to increase further and sell the rest of our stake in slices. Once it is sold entirely, we will continue to avoid home-country bias, deploy the winnings in a new overseas investment and, with any luck, repeat the success.
Philip MacKellar is the general manager at Contra the Heard Investment Newsletter.