ASE poised for recovery

Greece may fight it out with Germany, Sweden and Ireland for the title of the worst performing developed stock market of 2002, however, there are encouraging signs that 2003 will be a better year, putting an end to the Athens bourse’s three-year steep decline that has erased billions of euros of personal wealth and negatively affected investor sentiment. On the positive side, downward earnings revisions in most large-caps seem to have run their course, while valuations seem to be more reasonable than a couple of months ago with some listed companies, such as telecoms, trading at a deep discount compared to their European peers while others, such as banks, are trading at much smaller premiums than their peers. On the negative side, the liquidity of the Athens bourse remains low, while forthcoming privatizations threaten to drain more liquidity out of the local market. Nevertheless, the foreign markets hold the key to a sustained recovery in 2003 and this, in turn, has more to do with economic growth than anything else. As of last Friday, the MSCI-Greece index ranks second only to Germany’s in terms of year-to-date losses among developed equity markets, with 35.52 percent compared to 36.07 percent for Germany. Sweden is the third worse performing market, recording losses of 33.64 percent since the beginning of the year, while the MSCI-Ireland index follows with losses of 30.97 percent. It should be noted that Germany registered gains of 5.19 percent in November versus 13.20 percent for Sweden, 3.53 percent for Ireland and just 2.20 percent for Greece. Despite its year-to-date under-performance, the Greek stock market is estimated to trade at par or even at a small discount with the rest of Europe on estimated 2002 earnings, depending on the indices one uses as a proxy for market performance. This is mainly the result of continuous downward revisions in earnings following a series of negative surprises by index heavyweights, mainly banks. Earnings recovery seen According to analysts who closely follow the major Greek listed companies, downward earnings-per-share revisions both for 2002 and 2003 seem to have bottomed out, increasing the likelihood of a better share price performance next year. They forecast yet another write-down of equity holdings by many Greek companies at year-end which, coupled with severe trading losses for the third consecutive year, paves the way for an earnings recovery in 2003 in line with a projected increase in sales on the back of yet another year with strong economic growth. It is known that heavy trading losses and write-downs of equity holdings have hit many Greek firms’ bottom line in the last three years, creating a wedge between top line growth and earnings-per-share performance. Still, with the Greek economy continuing to grow at a fast clip, mainly thanks to EU inflows, 2004 Olympics-related spending, a rise in personal disposable income and the firms’ once huge financial income depressed, the same analysts argue that revenue growth will finally have to show up on their earnings, boosting sentiment and improving comparable valuations vis-a-vis their peers. It is noted that Greek GDP is estimated at 3.3 to 3.8 percent this year and at 3.0 to 4.1 percent next year. Nevertheless, a few questions remain. International Accounting Standards (IAS) will be introduced next year, forcing some banks to take large charges against their employees’ pension liabilities, which may or may not be offset by marking-to-market their real estate holdings. Moreover, heavyweight banks continue to trade at a premium, estimated between 10 and 20 percent, depending on the bank – in terms of P/E versus other European banks which does not bode well for a recovery. Still, their loan books look set to grow further, albeit at a slower pace, next year and their flat commission income seems set to rise, and this may be more pronounced if the stock market finally recovers. The reason is because a portion of commission revenues comes from lending and other banking activities and part from asset management activities linked to the stock market. A stock market recovery will almost certainly generate more income from their trading stock portfolio, but is likely less from their bond portfolio. Costs will continue to be an important factor shaping the bottom line but most banks seem to have taken steps to rein it in under the context of existing labor market legislation. Still, strong loan growth will force some to seek ways to boost their capital base, some following Alpha Bank’s recent example of issuing a hybrid product, while others, smaller banks such as General Bank, will have no choice but to resort to a share capital increase which may be unwelcome by the market. In addition to banks, telecoms may have a good year in 2003, especially if the European telecoms sector is rerated, pulling laggard OTE to higher price levels. All three Greek telecoms, that is, OTE, CosmOTE and Panafon-Vodafone, appear to be trading at significant discount to their European peers for different reasons. In the case of CosmOTE, it is mainly due to fears of share overhang – Norway’s Telenor wants to sell its 18 percent stake – which have not allowed the company to capitalize on its impressive growth. In the case of Panafon-Vodafone, it is limited growth prospects. In the case of OTE, it is concerns about the performance of fixed-line telephony and its inability to convince the investment public and some of its foreign shareholders that its investment in Romanian telecommunications organization Romtelecom makes sense in view of its increased risk profile and lack of earnings visibility. Even allowing for this, it is generally accepted that OTE shares have some upside potential purely on valuation grounds. Looking at other sectors, cement seems to be a clear winner with Titan and AGET Heracles, a subsidiary of France’s Lafarge, expected to build on a strong domestic construction market to produce double-digit earnings growth in 2003 and perhaps 2004. Some large construction companies are also expected to show a significant increase in earnings judging from a huge backlog of projects, although the quality of management and transparency are issues. The same may be true of some metallurgical companies. In the food sector, heavyweight Coca-Cola HBC is expected to post an increase in revenues and earnings, aided by a mild recovery in Western European markets and a continuous strong showing in Central and Eastern European markets. Although all this paints a rather rosy picture of the Athens bourse next year, it should be noted that this is based on the assumption of faster economic growth in Euroland as well as the USA, which cannot be taken for granted. This is especially true for index heavyweight Greek banks, which continue to be a less attractive investment proposition on valuation grounds at this point. Nevertheless, the chances of global equity markets posting gains rather than losses next year are higher even by historical standards. Even if this is not the beginning of a new global bull market but rather the familiar in-between transition period from a major bear to a bull market, stabilization will be welcome after three consecutive years of steep losses.

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