Hope on Greece, Caution on Ukraine
European shares rise amid efforts to deal with two of the Continent’s pressing problems. Also, the case for videogame maker Ubisoft.
Encouraging developments on Greece and Ukraine lifted investor sentiment in Europe last week, but the positive impact might be only brief.
Greece’s attempt to secure less-restrictive conditions from the multinational institutions that orchestrated its 240 billion-euro ($274 billion) bailout look unlikely to run smoothly, but a compromise seems to be the most likely outcome. The implications of a cease-fire agreement between Ukraine and Russia appear far more unpredictable.
Investors didn’t dwell on the details, relieved that Europe was at least trying to face up to its thorniest problems. European stocks rallied, ending up 1% on the week. Greek stocks jumped 11.28% on the week, while Russian equities climbed 10.5%. Both markets remain about 30% below their levels a year ago. The euro strengthened fleetingly, but Friday traded at $1.139, down 5.8% since the start of 2015.
Among Greek stocks, banks were major beneficiaries. Shares of National Bank of Greece (ticker: ETE.Greece) were up about 33% on the week. It looks cheap at just 0.5 times book value and less than nine times forecast 2015 earnings, but it can’t escape the whiplash volatility of an Athens listing.
The friendly rhetoric emanating from last week’s meeting between Greece and euro-zone finance ministers in Brussels is an indication that paymasters are sympathetic to the new Athens government, which was elected last month on a pledge to seek debt relief and end the country’s crippling austerity.
Prime Minister Alexis Tsipras is determined to achieve improved terms that will ease the financial hardships the country has endured—the jobless rate is above 25%—but Greece has few cards to play. Its current agreement with lenders expires at the end of February, and Tsipras is reluctant to extend it. But in the absence of a new deal, the Greek government is expected to run out of money in March.
Both sides want to avoid the Doomsday scenario of a Greek exit from the euro zone. Although the European Union has implemented firewalls to stem the threat of contagion since Greece first imploded in 2010, the repercussions are highly uncertain.
Michael Hessel, political economist at Absolute Strategy Research in London, says that support in Greece for euro-zone membership is underestimated: “What we have been telling our clients is to step back and look at the incentives.”
Negotiators are to reconvene Monday to try to hammer out a deal. They must agree a bridging program to stop the government running out of money next month. They also need a compromise on Greece’s medium-term debt and budget policies. “Like most investors, we are assuming both deals can be reached,” says Dario Perkins, chief European economist at Lombard Street Research in London. “But it is unlikely this would provide a permanent solution to the crisis, not without an economic revival powerful enough to reduce unemployment.”
In Eastern Europe, the situation is less clear-cut, due to doubts over implementation of the truce, and over whether the terms agreed actually reflect the interests and true intentions of Russia and Ukraine.
The cease-fire, brokered by the leaders of Germany and France, could result in a pause in EU sanctions imposed on Russia if the initial steps are implemented. However, few have optimism that the truce will be lasting, and investors hoping for a sustained rebound in the value of Russian assets likely will be disappointed.
INTERACTIVE GAMES maker Ubisoft Entertainment (UBI.France) seems to be winning a battle of its own.
Its shares, which closed Friday at €17.76, have climbed in 2015, but still look inexpensive at 14 times forecast earnings for fiscal 2016. Rival Activision Blizzard (ATVI) trades at a calendar-year multiple of about 16, while Electronic Arts (EA) changes hands at a fiscal-year multiple of 21.
A consensus of analysts’ price targets of €20.64 suggests upside of about 16%, but Berenberg Bank reckons that Ubisoft could be worth €21.50—about 20% above the latest quote. “Despite the strong rally, Ubisoft’s valuation continues to look cheap in our view,” comments Berenberg’s Robert Berg.
Ubisoft, which has a market value around €1.92 billion, last week raised its targets for sales and profits for the year ending March 31, due to the success of games like Assassin’s Creed Unity, Child of Light, Far Cry 4, and Just Dance 2015. Its market share has climbed to 12.8% from 9.6% a year ago. The projected increase in earnings—to €165 million from €150 million previously—comes despite the acceleration of €50 million in R&D expenditure from fiscal 2016 to 2015. Sales are estimated at €1.44 billion, up from €1.40 billion. In sum, Montreuil, France-based Ubisoft looks like a winner.