JP Morgan: Sees opportunities in Greek bonds and stocks

Her Eleftherias Kourtali

The announcement of the final form of the tool against the fragmentation of the ECB is expected to lead to a reduction of Greek bond spreads, while the Greek stock market has significant support in terms of valuations and prospects for upgrades, at a time when Greek banks are likely to surprise most investors, estimates JP Morgan.

More detail, in terms of the market I confessν, η JP Morgan notes that there is still a decent discount embedded in the region’s spreads at current levels, around 75 basis points in Italy, and about mp in Spain, Portugal and Greece. It expects part of this discount to be deducted in its basic scenario for the course of the spreads of the region when the design of the new tool is announced against the fragmentation of the European Central Bank.

In the case of Italy, JPM’s target for the end of the year is 200 bp after falling to 180 bp in the coming months based on the expectation that the market will add the valuation of uncertainty to Italian bonds due to the growing political “noise” as the country heads to the parliamentary elections in early 2023.

In the case of Greece expects continuous de-escalation of spreads during the rest of the year as well as in 2023. So he expects that will be formed at 210 p.m. in September from about 235 p.m. today, at 200 p.m. in December 2022 and March 2023, and at 170 p.m. in June 2023.

In whatever time the Greek economy, JP Morgan expects growth of 3.5% this year in Greece with him inflation to reach 6.3%. The Greek debt is expected to fall to 186% of GDP this yearand the budget deficit p4.3% of GDP.

In terms the movements of rating agenciesJP Morgan expects that in general they will remain stable though there is a risk of degradation in the euro area as a whole in the event of deteriorating macroeconomic conditions, while investor positions are limited due to deteriorating liquidity.

In particular, as he states, rating agencies have upgraded the outlook for a few eurozone countries (ie from constant to positive). Greece, Ireland and Cyprus also received rating upgrades in the first half of 2022. In their recent comments, rating agencies stated that Eurozone economies remain resilient thanks to fiscal policies and economic reforms implemented after the pandemic. However, they stressed that there could be a downgrade of the outlook or even the assessment in the event of major adverse macro-shocks, for example due to the escalation of the war in Ukraine and the high prices of energy and goods. Its basic scenario is that ratings will remain broadly stable for the rest of 2022, unless there is a significant macroeconomic shock that will lead to negative moves, initially in the outlook.

For investors’ positions in the region’s bonds, JPM reports that real money investors have become (slightly) underweight for the first time since mid-2018.There was significant short covering on the day of the ECB ad-hoc meeting on 15 June.

Support for Greek shares in the second half

The first half of the year was difficult for investors with prices falling across all asset categories. This was the result of the Fed’s aggressive measures to tackle inflation, which is largely out of control – as it is driven by food and energy inflation, supply chain breakage due to COVID-19 and war in Europe. As noted, there is a prospect not only of inflation being due to energy shocks and food market shocks but also to a recession created by the Fed and other central banks.

JP Morgan economists however, they do not see a recession this year. Although the chance of recession has increased significantly, it is not the baseline scenario for the next 12 months. It sees global growth accelerating from 1.3% in the first half of this year to 3.1% in the second half. Similarly, sees inflation falling from 9.4% year-on-year in the first half to 4.2% in the second half, which would allow central banks to avoid causing a recession. He also expects that China’s growth will accelerate significantly to 7.5% in the second half of the year, from basically zero (0.5%) in the first half of the year. This will provide huge support not only to the assets of Asian emerging markets, such as Chinese stocks, but also to the global circle.

JPM believes that the second half of the yearawareness of economic constraints and realpolitik will lead to progress towards a solution or at least a lasting ceasefire in Europe, which will alleviate the worst geopolitical fears. He continues to believe in the “super cycle” of goods and considers commodities and commodity-related assets to be a valuable source of returns and a significant hedge against inflation and geopolitics.

The opposite winds facing global stocks — inflationary energy prices and a strong dollar — are key positive winds for the Middle East and Africa markets. And given that these markets make up more than 60% of the region of Central and Eastern Europe, the Middle East and Africa, in which JPM also places the Greek market, premains particularly positive for CEEMEA as an area as a whole in the context of Emerging Markets.

In the short term, however, sees more risks than opportunities, as it typically states. Nevertheless The Greek market offers support in terms of valuations and the possibility of some upgrades. Central Europe is suffering more than Western Europe from rising inflation, and given the sharp rise in the region’s bond yields, JPM is surprised that stocks have not depreciated further.

Valuations remain the lowest in Central Europe, and JPM is comfortable with its neutral stance in several markets in the region. As far as Greece is concerned however, in which it also maintains a neutral position, Stresses that it offers a strong recovery path after COVID-19 thanks to EU funding and banks are likely to surprise most investors with a ROE 10% equity return from the fourth quarter of 2022. In a report last week, JPM stressed that for investors with a defensive portfolio, Greek banks are the right play .