Greek Stocks Poised for Best Performance in 20 Years

New leader Kyriakos Mitsotakis has pledged to lower taxes and woo businesses, injecting fresh optimism into the market

Greek stocks are headed for their best year in two decades amid investors’ optimism that a new government will be able to pare back austerity measures and revive the debt-laden economy.

The Athex Composite index has risen 35% since the end of last year, making it the best performer in Europe this year and putting the benchmark on track for its biggest advance since 1999, when the value of the gauge doubled.

The rally began at the end of December as investors bet that then-Prime Minister Alexis Tsipras —who lost popularity with both businesses and middle-class households after raising taxes to meet budget targets—would be replaced by Kyriakos Mitsotakis. Investors are now looking to Mitsotakis, who took power last month, to deliver on his election promises of lowering taxes and cutting through red tape on investment projects to bolster economic growth.

“There’s been a turning point for investor perception,” said Giuseppe di Mino, a managing partner at London-based Amber Capital. “It will be very interesting to see what they do, beyond what they say they will do.”

Amber Capital, which has $1.5 billion in assets under management, has been investing in Greece’s consumer-product companies, Mr. di Mino said. His firm currently owns less than 2% of Athens-based online-gaming company OPAP , but is considering buying more of the stock if the new government is able to deliver on promises to boost economic activity, he said.

No Longer a BargainForward price/earnings ratioSource: FactSetNote: P/E figures are based on the next twelve months

The change in investors’ sentiment—underscored by an increase in the price-to-future earnings ratio on the Athex index to 14.1 from 10.4 at the end of 2018—marks a sharp turnaround for Greek equities. They have gone from trading at a discount in relation to the pan-continental Stoxx Europe 600 index in December, to a premium in recent weeks. And that is despite an increase in the valuations on the broader gauge in the same period.

“It seems that investors—both Greeks and non-Greeks—seem to have faith in the new government,” said Ioannis Kokkoris, chair in competition law and economics at the Queen Mary University of London.

Still, Greece’s benchmark equity index remains 84% below its October 2007 level, while its economy has shrunk almost 25%. The prospects for the economy also remain grim—with high unemployment rates and tax rates that are suffocating business activity—while  red tape and slow-moving legal system have long-acted as a deterrent to foreign investments.

The latest developments in Argentina—where markets were roiled this week by political upheaval—may also act as a cautionary tale for investors. Investors’ concerns about the possible return to power of the populist Peronist movement saw the Argentine peso weaken more than 30% against the dollar before the central bank stepped into currency markets Monday, while the benchmark stock index closed 38% lower.

But the rise of  Mitsotakis’s conservative party has left many investors speculating that the worst of the post-2008 crisis period—when Greece was among the most badly hit European nations and was forced to adopt a series of stringent austerity measures to balance its books—may be over.

“2019 started much better, and I think the background for the whole story is that a lot of different adjustments over the last 10 years are done,” said Tim Umberger, a partner at Sweden’s East Capital, which manages 3.8 billion euros in assets. “I think the jury is out there, but one should not underestimate the opportunity for the country to grow.”

Umberger said his firm has been investing in Greek banks, which he sees as cheaply valued, since the beginning of the year. He declined to name the specific lenders.

Those avoiding the banking sector are looking further down the road to companies that can tap into Greeks’ disposable income, once the promised tax-reductions kick in.

For instance, William Scholes, investment director for global emerging-market equities at Aberdeen Standard Investments, said he has been buying shares in toy store Jumbo SA,household-products company GR Sarantis SA and consumer-goods company Fourlis Holdings SA. The asset manager, which has $643.3 billion in assets under management, began investing in the stocks about two years ago and now has a little over $7.5 million in the stocks.

While the interest of such foreign investors to Greece’s stock market may cheer many in the nation, others are betting that it could be just the start of a much bigger rally, if the new government delivers on its promises to bolster economic growth.

“We have seen the twinkle in the eye, but I don’t think we’ve seen the main flow,” said Spyros Malavazos, executive director of equities and derivatives for Greece-based Alpha Finance. “Not yet.”