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Possible opportunity in the Greek crisis [ClearOnMoney]
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Possible opportunity in the Greek crisis

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Commentary

Possible opportunity in the Greek crisis

3 Jul 2012 by Jim Fickett.

Last week Mebane Faber at World Beta noted that the Shiller CAPE (Cyclically Adjusted Price Earnings ratio) for Greece was phenomenally low and, further, that when other stock markets experienced CAPEs that low in the past, excellent returns followed. Here are his data:

We examined 32 countries … We created Shiller 10 year cyclically adjusted price to earnings ratios for every country. …

I was reading an article from one of the banks that was talking about how low Greece’s CAPE was (the article cited around 2). I wanted to examine what happens when a CAPE was really, really low. So, we looked at the database for all instances where CAPEs were below 5 at the end of the year. We only found nine total out of about 1000 total market years.

US in 1920

UK in 1974

Netherlands 1981

South Korea 1984,1985,1997

Thailand 2000

Ireland 2008

and … Greece in 2011

Now what would happen if you invested in these markets, the literal worst of the most disgusting terrible markets/economies/political situations? Below are local country real returns (net of inflation):

On average:

1 Year: 35%

3 Year CAGR: 30%

It would take a strong stomach to invest in Greek stocks right now, but this suggests that it might be a good investment. Note though, that Faber only gives the average; it would be interesting to know the range of returns. Also, note that an investment in Greece right now presents huge currency risk as well as business risk – i.e. you would invest euros but might get paid back in drachmas.