In markets riddled with uncertainty over their short-term prospects, investors prefer to minimize risks rather than maximize returns. They do this by abandoning shares and corporate bonds, turning to the more secure state bonds and other specialized investment products. This has been in evidence throughout the world in recent months, with small investors abandoning equity for bond funds. The bond market does not seem to have completed its upward course. Risks are still there, of course, but danger signs are relatively easily discernible, says Salomon Smith Barney Hellas’s general manager, Giorgos Kofinakos, whose firm provides investment services to Greek insurance companies and large corporations, private and public. «The picture is still not clear whether stock markets will pick up soon, but we believe that such a move will happen later rather than sooner, that is, we do not expect it to happen in the first quarter of 2003, but rather, in the second half,» he said in an interview. Uncertainty «The geopolitical, financial and macroeconomic cycle of uncertainty seems to be still weighing down the markets, despite recent rallies. Nevertheless, risks, particularly as regards Iraq, are not likely to disappear quickly. It would, therefore, be correct to forecast that current trends will continue into 2003. They will start waning after the first quarter and on condition that outstanding problems are solved in a favorable way. «As regards state bonds, we would prefer titles of a longer rather than shorter maturity (10-year, for instance), at least for the beginning of next year, and we would change this attitude gradually, as the short-term prospects become clearer,» says Kofinakos. Paradoxically, he adds, it could be said that prospects for the economy are much clearer 10 years ahead than for the next few months. As regards corporate bonds, the climate is not good, as big corporate failures led their spread from state bonds to reach historical highs in May and June. «Even though the situation has improved since, spreads remain wide and not necessarily attractive,» he says. «Investors focused on risk management rather than on maximizing returns in 2002. This is reasonable because in difficult periods you go on the defensive and try to safeguard what you have, avoiding the risks entailed in trying to increase your return.» At least for the first quarter of 2003, the market will remain oriented in this direction, Kofinakos believes. State bond prices reached their highest point for the last 15-20 years. Shares are not considered expensive right now: They are about 20 percent lower than bonds; this is derived from a rather simple calculation, the comparison of the yield of a 10-year bond with the reverse price-to-earnings ratio (P/E), the so-called equity yield, which Kofinakos believes to be a relatively reliable approach. After the recent upgrading of Greek state bonds by Moody’s, they are almost at the same level as Italy’s, that is, their spread from benchmark German bonds is almost the same. «In other words, Greece finances its public debt on the same terms as Italy does,» he says, even though Greece’s credit rating is two grades lower than Italy’s (A1, against Aa2). «The market is showing greater confidence in Greece than credit rating agencies. That’s why the spread has come so close to Italian bonds.» Kofinakos thinks it is «somewhat unfair» for Greece to have the same rating as some countries outside the eurozone, such as the Czech Republic, Poland or Lithuania. Progress «The Secondary Electronic Securities Market and the Bank of Greece on the one hand, and the Public Debt Management Organization and syndicated issues on the other have done a very good job and managed to place Greek bonds with investors in all five continents, which is new and represents big progress, considering how timidly this market started five years ago,» he says. He stresses that Greek public debt managers have managed to place it mainly with insurance companies, mutual funds, central banks or small, long-term investors, many of whom retain it until maturity, avoiding speculators. In recent months, small investors in the US and Europe have been turning to bond funds; outflows from equity funds amount to $30 billion since July. Kofinakos believes «we are not at the end of the cycle and interest rates will remain low for some time still.» But he warns that if we see the economy picking up in the first quarter, or possibly inflationary pressures (the two «danger signals» for bonds), before central banks begin raising interest rates, small investors must start their exit, but not abandon bonds altogether.