Ten-year Greek government bonds – deemed ‘uninvestable’ at the height of the eurozone crisis – are currently yielding 2.2%. What makes this remarkable is firstly that yields in Greece are now only slightly higher than those in the US, meaning investors effectively require the same compensation to lend to the Greek and US governments. More interesting is that the structural concerns that saw Greek 10-year yields spike to 35% in early 2012 have not been resolved; only marginally improved.
This serves as a timely reminder to South African investors that things are not always as bad as they seem – and that even a small improvement to seemingly dire conditions can spur a strong pick-up in investment returns.
There are striking similarities between Greece in the early 2010s and South Africa now
In 2011/2012, Greece faced one of its darkest times in recent history: it was at the height of its debt crisis and on the brink of exiting the European Union. The similarities to current conditions in South Africa went beyond worryingly high fiscal debt levels. In addition, Greece was experiencing endemic corruption, low growth and inflation, slow infrastructure development and high levels of emigration and unemployment. Deep despair and pessimism were prevalent in society and factored into asset prices, with citizens and investors alike believing there was little hope.
The point of maximum pessimism in Greece proved to be the best time to invest
Had you invested in 10-year Greek government bonds at their low point in May 2012, you would have made your money back over nine times, with a return of 40% per year, as shown in the graph below.
Graph: 10-year Greek government bonds have returned 40% per year since May 2012
Source: PSG Asset Management, Bloomberg
Greek asset prices compensated investors for structural issues and weak sentiment
Many of Greece’s structural concerns remain unresolved – and while some have improved, others have worsened. So why have asset prices normalised? Primarily, because they were simply too cheap. Prices factored in a permanent worst-case scenario, with no possibility of improvement. The slightest restoration of balance – the realisation that while times are tough, they may not be all-out hopeless – saw prices return to more realistic levels.
It is impossible to predict transition points
While many market commentators agree that South African assets appear to be offering good value at current valuation levels, most are waiting for conditions to improve before deploying capital. However, no one can predict when the turning point will be. We only know that history has shown time and again that sellers eventually dry up and buyers realise their negativity is overstated. When this happens, asset prices can normalise quite dramatically.
Could South Africa follow Greece’s example?
As in Greece in 2012, we believe that South African investors are focusing solely on the country’s structural issues, and not on asset prices. However, with excessive pessimism priced in, many asset prices are compensating for the issues at hand. Various factors contributed to prices in Greece normalising, including the possibility of support from the European Central Bank. South Africa’s circumstances are clearly different. However, what this has shown is that when prices get too low, the odds move further into investors’ favour. Historically, times like these have proven to be excellent buying opportunities.