By Ingrid Melander
LONDON (Reuters) - Even if it's going to take more than a pro-bailout election win to tempt most investors back to troubled Greece, a rare few seem to be taking a punt on its hugely under-valued stock market.
EU policymakers and many investors breathed a sigh of relief when the conservative New Democracy and Socialist PASOK, who both back the bailout plan that keeps the country afloat, won enough seats on Sunday to form a coalition.
With Greek stocks trading at six times 12-month forwards earnings according to Datastream, just under half of the price-to-earnings ratio of Wall Street's S&P 500, some could be tempted now that the immediate risk of a euro exit has been pushed away by Sunday's general election.
"We've seen interest," said George Zois, senior equities broker at frontier markets brokerage Exotix. "Some investors are moving in, and more people would look to proceed once the macroeconomic situation is better."
Although worries over Spain and Italy eclipsed initial relief over the Greek election in European markets, the Greek bourse has gained almost 6 percent since last Friday.
To put that in context, it is still down 80 percent from the beginning of the debt crisis in October 2009. But it's also almost 25 percent higher than the intra-election trough on June 5, when many worried about the possible victory of anti-bailout leftists.
Exotix has been doing trades primarily with U.S. hedge funds building up positions in the run-up to the June 17 repeat election and has seen more interest after the poll, Zois said.
"It's not because we have a 'good election' result that investors will rush in, but assets of the top 20 Greek companies are largely undervalued ... some investors are dipping their toes," he said.
Investment in Greece is still marginal, with fears over the continued political uncertainty, anti-austerity anger and a deep recession high on the agenda, as well as worries over the impact of the crisis in the rest of the euro zone.
James Barber, European equities portfolio manager at Russell Investments, said risk aversion towards holding Greek equities was still high, with stocks very volatile. The firm has just 1 basis point invested in Greece in their Continental European fund and holds no exposure in its Pan European or Euro zone funds.
"Greek banks are very cheap but for good reason, you could still lose all your money or a big part of your money," Barber said.
Greek companies have been hard hit by the economic contraction and consumption slump in their home market and most banks, in particular, have posted steep losses.
But export-oriented firms such as metals group Mytilineos, oil refiner Motor Oil as well as betting firm OPAP, which is slated for privatization, managed to post profits in the first quarter, even if sharply down year-on-year, and have started drawing some interest, traders said.
"If you think Greece will remain in the euro zone, with a little bit of money you could take a punt on Greek assets," Dan Morris, Global Strategist at J.P. Morgan Asset Management, told a conference call, while adding that Greek firms might still struggle and he did not see them as a core euro zone investment.
There are clearly some signs of life, judging from market volumes over the past couple of weeks.
Activity jumped to about 100 million shares traded on the Athens stock exchange on Monday and nearly as much on Friday before the vote, up from as little as about 20 million in some days in May and around 10 million in the last few days of April, an official at the Athens bourse said.
On average, daily volumes traded are up in 2012 and not far from pre-crisis 2009 levels, the official said, although the total value traded is sharply down.
This week's increase in Greek stocks - which contrasts with the fortunes of the latest frontline markets of Spain and Italy - was largely due to short-term bargain hunting, said Takis Zamanis, chief trader at Athens-based Beta Securities, with more mainstream investors waiting for a government to be in place and progress on reforms and recovery.
"There are some hedge funds who are high risk takers but a majority are Greek investors," Zamanis said. "A lot of them are retail ... most of them are gambling."
The Greek market is particularly volatile. Historic 30-day annualized volatility is more than 50 percent for the DS Greece index, a calculation of the standard deviation of daily returns over 30 days annualized, compared with 16 percent for the S&P 500. The risk implied by that sort of volatility would automatically exclude most large investment funds, who have fairly strict limits to the sort of risk they can take on their books.
New Greek government bonds have rallied slightly to 13-17 cents in the euro from around 12 cents last week but are still priced below their level before the inconclusive May 6 election and volumes are still very low.
Greece went through the biggest sovereign debt restructuring in history in March, slashing its debt mountain by about 100 billion euros, or close to a third. But its new bonds still trade at distressed, default levels and remain rated well below investment grade, preventing most conservative mainstream investors from buying them.
Morgan Stanley said in a research note that bond prices were likely to rise to pre-election levels of 19-20.
"To the extent that a pro-bailout government emerges, such an outcome would take us to a political backdrop similar to that prior to the election on May 6, when the market didn't perceive the risk of a euro zone exit as being imminent," it said.
Most are still very wary and a prominent hedge fund manager said on condition of anonymity that it was too early to buy Greek bonds unless they went down to 5-7 cents. But some investors bought bonds ahead of the June 17 election, betting on a pro-bailout outcome.
"We have positioned ourselves for the probability that a coalition could govern Greece" said Joao Zorro, fund manager at Portuguese bank Espirito Santo.
According to data from Lipper, Zorro's Euro Bond fund had about 4.5 percent of its portfolio in Greek sovereign debt as of end-April, a 50 percent increase from the end of February. The fund has assets of close to 20 million euros.
Zorro said, however, that he was not planning any more investment in Greek bonds for the time beings, over worries that any pro-coalition government could be short-lived.
"At this stage we will stick with the exposure that we have. We don't want to rush anything before we have more details," he said.
(Additional reporting by Scott Barber, Carolyn Cohn and Joel Dimmock in London, Blaise Robinson in Paris and Laurence Fletcher in Monaco; Graphic by Scott Barber; Editing by Hugh Lawson)