Failings of listed firms drive foreign investors further away

Back in May 2001, when the Athens Stock Exchange was about to leave the world of emerging markets and enter the new grand world of developed markets, a large number of local investors hoped this would lead to a new era and that large foreign institutional portfolios would snap up shares of listed companies, driving the market higher. Well, it did not happen that way. The new Athens bourse has put on one of the worst performances among developed markets ever since, wiping out billions of euros in investor wealth. Although external factors contributed to that outcome, the inability of Greek companies to attract foreign institutional funds also played a significant role in the market’s downward trend. If it is not corrected, local firms and the market will find out that sustained recovery is an unfulfillable dream. Greece, Germany, the Netherlands, Switzerland and Belgium compete for the title of the developed bourse with the biggest losses again this year, with Greece and Germany high up on the same list in 2002. This may surprise some observers because of the Greek economy’s strong growth credentials. However, it is hardly surprising to others who are aware of the high reliance of some Greek heavyweight companies’ stocks on trading income and capital gains from their stock portfolios and equity holdings in the past, as well as their slow adjustment to the corporate standards of other listed companies in other developed markets. Despite misgivings about the investment story of some Greek large-caps, especially banks, there are still some other local medium-sized Greek companies with undemanding valuations, persistent operational earnings growth and good earnings visibility ahead which could have been prime candidates for investment by foreign funds. But they have failed to become so because they did not realize the importance of investment relations and the strict adherence to corporate governance rules. As a large fish in the small pond of emerging markets, Greek companies were largely resigned to the idea of pursuing an active policy to attract the interest of foreign funds. Foreign analysts familiar with the Greek stock market still remember how difficult it was to convince even the largest companies to provide them with detailed financial figures and answer their questions promptly. This was tolerated at the time because the situation in the world of emerging-market companies they were looking at was not much better – in fact, it was worse. There was also no pressing need to do so since the Athens bourse was heavily weighted in the MSCI (Morgan Stanley Capital Indices) and almost all funds investing in emerging markets had to have some exposure in the local market as well. The entry of the Athens Stock Exchange into developed markets changed all this since Greece became overnight a small fish in a large pond. The previous heavyweight in MSCI indices gave way to a lightweight that a few foreign passive funds chose to ignore, depriving the local market of a much-needed fresh cash injection at a time emerging-market funds were selling their last shares. With foreign funds following passive funds’ strategies, that is strategies aiming at duplicating the return of MSCI benchmarks, only foreign funds with more leeway in investment strategies could fill the gap. However, this was not the right time. All markets were bear markets and few active funds were interested in growth-oriented investments, something a few Greek companies were trying to sell. They were more interested in value stories, that is cheap valuations, and sizable market capitalization, which a handful of local companies had to offer. However, even they did not know how to sell their story. In addition to all this, the protracted decline in the Athens bourse discouraged local retail investors from participating and had an adverse impact on liquidity, which made things worse with respect to attracting foreign funds. Although it was pretty clear from the beginning that Greek firms were lagging behind in the investment relations area, few rushed to address the problem by setting up their own investment relations office. Even those who did tended to confuse investment relations with public relations. Still, the number of listed companies with investment relations offices has grown in the last couple of years and especially in the last few months. However, most of them have found out that most of their staff, as former analysts (or something else), are not well equipped to assume this role. As a result, most firms have failed to attract foreign institutional funds at a time when retail investors are abstaining and local institutional investors’ role has been restricted by mutual fund share redemptions. Foreign analysts and fund managers familiar with the Greek market are quick to point out in private that, except for a few companies, all other firms have essentially written themselves off by failing to attract their attention. This is an ominous sign for the market as a whole. It is well known that foreign funds give direction to the Athens bourse on a daily basis, with local institutional investors either sitting on the sidelines or just following them. Analysts blame most local companies for lack of transparency and poor information disclosure practices though they admit some progress has been made. «They should not expect me to lower my standards to accommodate a small Greek company I take a look at just because I am Greek, to be honest with you,» said an equity analyst who works for a European investment house in London. He noted that «those companies which did not understand that will probably die» and quickly pointed out that even the vast majority of those firms which have moved to address the problem face another one: They do not have the right person to do the job. No doubt many Greek companies do not make the grade due to an unsatisfactory earnings outlook, small market capitalization and poor disclosure practices. But there are a considerable number of listed firms which could. These miss out simply because it never occurred to them that attractive fundamentals are not enough to attract foreign funds. They are the ones which have to do something about «selling their story» to the foreign investment community in a bid to prop up their share price and help the whole market recover, reigniting the interest of local retail investors.

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