No broad ASE recovery yet

By all accounts, the Greek economy managed to outperform the economies of its trading partners in the European Union in 2002, but this was not enough to pull its struggling stock market out of its protracted slump. Negative real interest rates, more attractive valuations and another year of projected strong economic growth should have boded well for Greek equities. Still, concerns about the state of the world economy and the eurozone’s in particular should have an impact on the Athens bourse, which coupled with doubts about the impact of IAS (International Accounting Standards) on the financial statements and balance sheets of Greek companies, make 2003 shape as another year for stock picking. Less than 10 calendar days before 2002 gives way to 2003, the Greek stock market continues to fight with Germany, Sweden, Finland and Ireland for the infamous title of the worst-performing developed stock market of the year in the world. Indeed, according to the most recent Morgan Stanley Capital International (MSCI) figures, the MSCI-Greece stock index had shed 37.69 percent in the year to December 20, a few percentage points less than Germany and others. The national MSCI-German index recorded losses of 41.57 percent trailed by Sweden’s with 41.12 percent, Finland’s 39.74 percent and Ireland’s 38.38 percent. France and Belgium followed with losses of 33.89 percent and 31.30 percent respectively. Putting aside Greek inflation, one of the highest in the European Union, it looks as if Greece will be the champion of economic growth in the EU in 2002 even if its GDP growth rate comes in lower than the government’s projection of 3.8 percent for the year. Still, the Greek economy is forecast to post high growth rates in the next few years on the back of large EU inflows, estimated at 4.0-5.0 billion euro per year, and an internally generated momentum. Greece’s updated Growth and Stability Program for 2002-2006 forecasts growth of 3.8 percent in 2003, 4.0 percent in 2004, 3.7 percent in 2005 and 3.6 percent in 2006. By all means, this is the perfect macroeconomic environment for corporate sales and earnings to grow. Still, strong growth rates on the order of 4.1 percent in 2000 and 2001 did little to help the Athens bourse recover with financials, mainly banks and insurance companies, being the main drag. A severe drop in financial income on the heels of collapsing stock prices and lower money rates overwhelmed, in most instances, the increase in their operating earnings to produce a severe drop in overall earnings and less attractive valuations in terms of various multiples such as the price-earnings ratio (P/E). Excluding financials, National Bank of Greece figures show, sales of listed companies rose 24.5 percent in 2000 and 10.3 percent in 2001, while EFG Eurobank Ergasias’s calculations show turnover was up 8.5 percent year-on-year in the first nine months of 2002. On the other hand, earnings before taxes of listed companies, excluding financials, rose 11.3 percent in 2000, eased just 0.1 percent in 2001 and were up 4.7 percent year-on-year in the January-September 2002 period. In this context, it is clear that the sharp drop in their stock prices in the 2000-2002 period should be accounted for by their unsustainably high valuations, the by-product of the Athens bourse’s long upward move which led to the 1999 bubble. These valuations became even more unattractive as the stock prices of their European peers plummeted in the same period, prompting rounds of share-price correction. Looking forward to 2003, one has to note the signs of earnings recovery evident in many companies’ 9-month financial results and the prevalence of more rational valuations vis-a-vis their European peers. Still, the fact that the third- and fourth-quarter results of 2001 were particularly weak may make yearly comparisons look more favorable than they should have been, which in turn means that one has to wait longer to ensure that a true recovery of corporate earnings is underway. Nevertheless, it cannot be ignored that the bottom-line profitability of most index heavyweight banks likely hit a bottom in 2002, therefore providing the base for an earnings rebound next year. This assessment is supported by signs that trading income has reached depressed levels in most cases, and commission income seems to be stabilizing, while efforts to control costs seems to be bearing some fruit. On the other hand, Greek banks appear to be expensive vis-a-vis their peers in Europe, which means the margin for stock out-performance is limited unless the shares of other European banks rebound. The situation appears to be different in telecoms, where all Greek operators – OTE, Panafon-Vodafone and CosmOTE – are clearly undervalued and the mobile firms still offer some decent growth on the back of increased usage. Still, firm-specific events such as OTE’s Romanian investment and CosmOTE’s potential hangover due to the stated intention of Telenor, a major shareholder, to liquidate its 18-percent stake, clearly shows that all of them need some catalysts to propel their stocks to higher levels. The rebound of European telecoms in 2003 could be one of them. Public Power Corporation (PPC), the state lottery OPAP, Coca Cola HBC, and Titan Cement are major companies that could play a major role in the Athens bourse’s performance next year. PPC can count on strong demand for electricity and a certain pickup in prices, but cost containment is a big unknown. OPAP, the cash cow, appears to be attractively valued and still has some growth and promises to pay a good dividend per share. Coca Cola HBC also has an attractive valuation, good management and a clear strategy, but there are concerns of share overhang here too. Titan Cement is also attractively priced and enjoys good growth prospects in the strong Greek construction market. Despite all these attributes, many local investors have shied away from equities in the last couple of years, sticking to money market instruments even though these provide negative real returns due to high inflation and taxation. Having suffered heavy portfolio losses from the Athens bourse’s protracted and steep decline, it looks as if their risk-aversion levels have hit an all-time high which is difficult to overcome. In addition to this, lack of confidence in the official authorities’ ability to clean up the bourse has compounded the problem. Still, some of them should take another look at equities, as negative real interest rates start to bite and corporate profits begin to recover; but this may take some time. All in all, 2003 appears to be another year for stock picking rather than the long-sought year marking the full recovery of the Athens bourse. This is more so given the uncertainties facing the international economic and market environment which transmit here via money flows and comparative valuations. The introduction of IAS also adds to uncertainties as most listed companies will file under IAS for the first time ever at end-2003.

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