Some saying Greece could be the word

Greece is getting interesting from an investment perspective as the country makes further reforms, its banking sector gets set to access cheaper financing, and a new agreement with the country's creditors brings a little stability.

But the consensus is that a case for investment in Greece remains difficult to make.

“The market does seem to be a little less concerned about Greece, at least as evidenced by the decline in risk over the last few weeks,” said Melissa Brown, senior director of applied research at Axioma Inc., in New York. “This is true for ... the Greek market in general.”

However, Greece remains far more volatile than any other market tracked by Axioma - including China and Peru. “There still needs to be a high expectation of return in order to justify the exceedingly high level of risk in the market,” Ms. Brown said.

Greece also has returned to the political stage. Last week, Greece reached a deal with its creditors that paved the way for a further bailout, following a set of reforms agreed to on May 22. This, the country's third bailout program, will provide Greece with the funds it needs to avoid default on payments due later this year.

Greece has been through a frightening time. It was on the brink of default last year, and the country's citizens went to the polls to vote on whether to exit the European Union — an issue that is once again plaguing the EU as the U.K. prepares to vote on its own referendum.

Until very recently, Greece — and its overwhelming debt load — did not look healthy. But there have been some interesting developments during the past few weeks, said Mark Dowding, partner and co-head of investment grade at BlueBay Asset Management LLP in London.

“We can see things moving in a constructive fashion in Brussels, it feels that we are seeing a conciliatory tone in Berlin, and in the IMF there is also a desire to deliver a pragmatic solution. All of this is looking more constructive. If Greece is the canary in the coal mine, the canary is looking as fit and well as it has done for the last couple of years,” he said.

While Mr. Dowding acknowledged that Greece still has its risks, he said its resurgence also bodes well for other high-yielding countries in the periphery, such as Portugal and Cyprus.

Some money managers call for cautious optimism on Greece.

“The backdrop remains one of an underlying improvement in Europe since the nadir of the European crisis in 2012,” said Nick Davis, European Income fund manager at Polar Capital Partners, based in London. “The ability of the eurozone to respond to shocks and crises has been gradually built out in recent years through new bailout mechanisms and a much more proactive (European Central Bank).”

Mr. Davis said this was evident in the “muted reaction by capital markets to the last iteration of Greek concerns in 2015.”

However, the firm is not encouraging complacency: “Many of the challenges, such as high debt and poor demographics, remain. A cautious approach remains appropriate to investing in the region given its undeniable challenges. But we are finding interesting investment opportunities amongst the volatility.”

Data provider EPFR Global's latest Global Country Selection Strategy report, which compares markets based on four-week average country flows, has Greece at “just the right side of the buy/sell divide,” said Cameron Brandt, director of research in Cambridge, Mass.

And the latest round of financing agreements has some money managers particularly interested in Greece's fixed-income markets. One source said the European Central Bank could start buying Greek sovereign bonds as early as June 2.

“The (ECB) has laid out some criteria, which if met, would make Greek government bonds eligible for the ECB's quantitative easing bond-buying program,” said Christine Johnson, head of fixed-income at Old Mutual Global Investors in London, in a statement in reaction to the deal. “Just think what a relief it would be if future government funding could be soaked up by the ECB.”

She said the eurozone's bailout fund, the European Stability Mechanism, could buy out the International Monetary Fund's obligations by issuing more of its own debt. The ESM can restructure these debts in ways unpalatable on a political level for the IMF, and Greek government bonds could escape any further restructuring. “A bond without threat of restructuring by a European country, that meets the criteria of the ECB's program — which could involve the monetary guardian hoovering up as much as €1.9 billion ($2.1 billion) of Greek government bonds a month — now that's worth playing for,” said Ms. Johnson.

There are also equity market opportunities.

“Greek banks offer opportunity to participate in Greece's recovery,” said Felicia Morrow, Washington-based chief investment officer and CEO of equities at Ashmore Group PLC. “Although banks have rallied since mid-February, they are roughly flat year-to-date because of a 64% drop in the first six weeks of 2016. Valuations remain at the low end of (the) EU bank valuation spectrum and close to 10-year lows on a price-to-book value basis vs. Greek banks' historical levels. The discount reflects still high country risk and poor asset quality.”

Ms. Morrow said country risk should fall as details become clear on Greece's debt restructuring, while banks are expected to become more profitable this year because of lower funding costs, an improving economy and leaner cost structures.

Pioneer Investments' emerging markets equity team has had an overweight position on Greece since the beginning of the year, which is a “non-consensus view,” said Marco Mencini, head of emerging market equities in Dublin. That view was particularly strong in February, when markets were nervous about Greece striking a deal with its creditors.

“The average view at the time was that Greece was very clearly uninvestible at that stage — but two months later we are hearing that people have done the math and are just waiting for an event of coming out of the European meetings to potentially push the button” to invest, he said.

The firm is particularly keen on Greek banks. Following a creditor agreement in August 2015, Greek banks obtained indirect access to the ECB via the central bank, but are charged a more than 200 basis points risk premium. Following last week's agreement, “those 200 basis points will be completely removed because Greek banks will have access to enormous funding like any other bank,” said Mr. Mencini.

Mr. Mencini also acknowledged the ECB's role in Greece's bonds market. “There is €3.5 billion of Greek bonds that would be bought by the ECB. That will likely bring the 10-year Greek bond yield much closer to 5%, from 7% at the moment. In essence, Greek banks will be able to access the market, and can replace really expensive funding with cheaper funding, leading to much better returns over time.”