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The Athens Stock Exchange reopened after five weeks on Monday, and Greek stocks promptly suffered their worst selloff in history, opening down about -23% from June 26’s close before regaining some ground to finish -16.2% lower. There are some fairly obvious lessons to draw from this—Greece is still in turmoil, investors are still concerned, “Grexit” remains a risk, political uncertainty abounds. But another, less discussed lesson is probably more useful for investors globally: Markets are pretty darned efficient. If ever you’ve doubted markets’ ability to quickly discount widely discussed events and information, a quick comparison between the ATHEX composite and a globally traded ETF of Greek stocks should restore your faith.
A lot has happened since Greek officials closed the Athens exchange on June 29, three days after Prime Minister Alexis Tsipras called a referendum on the EU/ECB/IMF “troika’s” bailout terms, giving Greek stocks a boatload to price in once they reopened—good (a new bailout deal and bridge financing), bad (heavy economic damage and a near-collapse of the government) and weird (Google “Yanis Varoufakis, Plan B, hack”). Yet investors didn’t have to spend five weeks wondering where Greek stocks would be once the dust settled. They had a handy real-time tracker, courtesy of the Global X FTSE Greece 20 ETF—GREK—which trades on the New York Stock Exchange but includes 20 Athens-listed companies. GREK kept trading the last five weeks, pricing in Greece’s soap opera real time. So while the ATHEX looked like this:
Exhibit 1: ATHEX Composite, June 29 – July 31
Source: FactSet, as of 8/3/2015. ATHEX Composite Index, 6/29/2015 – 7/31/2015.
GREK looked like this:
Exhibit 2: GREK, June 29 – July 31
Source: FactSet, as of 8/3/2015. Global X FTSE Greece 20 ETF, 6/29/2015 – 7/31/2015.
And when the dust settled on Monday, things looked like this:
Exhibit 3: ATHEX and GREK, June 29 – August 3
Source: FactSet, as of 8/3/2015. ATHEX Composite Index and Global X FTSE Greece 20 ETF, both in US dollars, 6/29/2015 – 8/3/2015.
GREK wasn’t a perfect barometer, but it was darned close, and circuit breakers and the ATHEX’s ban on short selling probably account for much of the difference. The near-match is impressive when you consider GREK investors trading an aggregate of 20 ATHEX-listed firms, not pricing all 60 constituents individually. Those constituents took some wildly divergent rides on Monday, with the five biggest banks losing -30% before circuit breakers kicked in, while the index’s largest constituent (the local Coca Cola bottler, which is over 10% of the index) lost just 3.5% and a local airliner, which comprises over 6% of the index, fell just -0.5%.
This is a testament to just how good markets are at discounting the analysis, opinions, predictions, fears and thoughts of every investor at every second. We suspect only a sliver (at most) of GREK traders kept spreadsheets tracking the estimated price movement of all 20 constituents and calculating a daily weighted average. Most probably traded purely on their feelings and expectations for Greece as a whole, with sentiment swinging as the saga twisted and turned. But collectively, folks knew everything they needed to know to price Greek stocks accurately, whether consciously or not. They knew the five biggest banks represent over one-fourth of the ATHEX, and they knew capital controls would hammer them. They knew capital controls would probably hit importers and manufacturers, too. And they knew staples and other less cyclical industries would probably help counterbalance the bank bloodbath. Even if no one person had all this information in their brain, the market’s collective wisdom did, and that collective consciousness produced a remarkable educated guess about the broad Greek market.
The rest of the eurozone provides further evidence investors had already digested everything in Greece. While Greek stocks sank on Monday, other countries didn’t. They had already discounted everything that happened in Greece over the past five weeks and moved on. The scoreboard tells you everything you need to know.
Exhibit 4: The Eurozone Knew This Was Coming
Source: FactSet, as of 8/3/2015. Price return on 8/3 for each index, in EUR.
So yes, markets are efficient. Sentiment-driven wobbles can make things seem otherwise in the very short term, but over time, markets pretty accurately reflect all widely known information. This might not tell you what lies ahead, but it does confirm that while Greece’s trials and tribulations are bad for Greece, global stocks have already moved on.