upside from current levels.
In a report entitled “Seeking Catharsis”, Eurobank states that this bottom-up target incorporates a 10% discount to our price target implied index value on the back of currently heightened levels of risk aversion. The upside is mainly driven by the banks as they share the burden of being in the eye of the storm along with the state as macro/systemic concerns are reflected in bank valuations first.
Eurobank believes a strong catalyst is imperative for the Athens Exchange’s index to outperform in 2011. In the absence of such a catalyst, worries about the sustainability of greece’s fiscal policy and debt position are likely to remain in the spotlight and limit opportunities for a sustainable stock market bounce.
Eurobank’s 2011 top picks include stocks with conservative balance sheets, strong cash flow generation, and exposure to the infrastructure/privatization themes as well as include the best capitalized bank to the mix.
National Bank, OPAP, Ellaktor and EYDAP are carry-overs from 2010 while it has also added OTE as a gradual domestic mobile business market
repair is expected. Besides the abovementioned positive investment case characteristics, Eurobank believes that all mentioned names could significantly benefit from managements’ respective cost containment initiatives expected to play-out in 2011.
Eurobank’s report, dated on January, 13, says that “a collective decision on a pan-European scale, sooner rather than later, could prove to be the remedy, alleviating concerns and ultimately changing the risk perception regarding sovereign risks. Recent statements made by EU officials talking about collective decisions aiming to put an end to market woes concerning the euro area and the currency itself suggests that something is prepping up in Brussels. Reportedly, the following are under consideration: (1) an expanded EFSF mechanism (currently at EUR440bn) (2) lower cost of funding (currently between 5-6% for the states under the EFSF umbrella or preceding arrangements) (3) bond purchases for the EFSF (currently QE is restricted from ECB’s mandate) (4) E-bonds (currently considered a threat to triple-A rated sovereign issuers).
We have argued for quite some time now that Greek equities have so far been and for the immediate future will remain a macro call. Therefore, valuation alone is not enough to trigger a clear change of course. But the implementation of any or some of the above-mentioned collective initiatives in the Eurozone would indeed be cathartic, a game changer and we suggest investors stay alert.”
It’s not because we feel that a development of this nature could significantly change earnings but rather trigger, as mentioned, a shift in risk perception. We asked ourselves how wrong could wrongful assumptions be so that we could get a sense of what the market is telling us. The answer partly suggests that the market is implying an estimated 17.5% market-wide cost of equity, which does stick out as quite high. It’s been the case that over the past decade at either market lows or highs the implied cost of equity had always deviated from what one would consider as normal. To top it all off, we feel that the domestic corporate world will capitalize on the opportunity to look within their respective organizations to extract up to estimated 18-19% of additional value by applying sensible housekeeping and bringing their opex cost base down.
Finally, Eurobank outlines that in 2010 its top picks portfolio outperformed the Athens Exchange’s General Index by 6%. Throughout the year, it gained profits from picks such as Bank of Cyprus, METKA, EYATH, PPC, Alpha Bank and Coca Cola Hellenic and as a result, its “closed positions” relative performance stood at +25%.
source: CAPITAL
