ATHEX between developed and emerging

The Greek economy needs a strong and healthy stock market so that companies can raise capital to make productive investments. However, the Athens bourse, in a prolonged slump despite some short-term rallies, has failed to live up to this role. Some think the remedy lies in a combination of macroeconomic stability and the stock market’s return to the emerging market status it gave up almost 12 years ago. Although this is an interesting approach, it does not seem to be the solution.

The general index of the Athens bourse stock has rebounded sharply after plunging to a multi-year low at 471 points last June on jitters about political developments. The benchmark stock index has more than doubled since then to hit a high of 1,052 points in February before easing to 960 points on Friday. The first leg of the rally since last summer was fuelled by large-caps, including banks, but the second leg was due to outperforming non-financial stocks, mainly OTE telecom, the Public Power Corporation (PPC), OPAP gaming company and a few others, as bank stocks underperformed.

The drop is more dramatic if one compares the current levels of the benchmark index with those a few years ago. To be precise, the general index has lost about 54 percent of its value since this time of year in 2010 when it hovered around 2,123 points, and some 74 percent since mid-March 2008 when it stood at 3,783 points.

Undoubtedly, the dive of the Greek bourse reflects the dire situation of the economy and its impact on the sales and the bottom line of most listed companies. The main stock indexes of the Athens bourse have paid a higher toll because they are heavily weighted in bank shares. Local credit institutions have suffered big losses due to their participation in the Greek debt restructuring (PSI) and the rise in nonperforming loans that has come on the back of a deep and protracted recession.

Under these circumstances, it was extremely difficult for existing and prospective listings to raise much-needed capital from the bourse at a time when bank credit became progressively scarcer and more expensive. Although the economy has yet to show signs of recovery, the diminished risk of a euro exit has helped attract some foreign funds and rekindled the interest of local retail and other investors.

But the foreign investors are comprised largely of speculative funds, mainly small and medium-term hedge funds, so far. Moreover, many retail investors appear to have lost the ground under their feet and sidelined on bank stocks, plunging close to zero as the recapitalization of the banking sector approached.

According to some pundits, it will be very difficult for the Athens Exchange to recover and play its role of supplying companies with much-needed capital even if Greece manages to produce a primary budget surplus this year, because developed market funds shun the bourse, and the incomes of local investors are hard hit by the prolonged recession.

They argue that the Athens bourse, which entered the developed market league back in 2001, is perceived by many developed market funds as an emerging market and therefore it would be better off belonging in this category so that it can formally attract the interest of emerging market funds. They say emerging market investors are more familiar with the Greek risk, unlike their developed market peers, because they have faced it in many countries within their sphere.

Although a Greek downgrade from the developed market league would bring about sale pressure from exiting developed market index funds, proponents of the emerging market classification say that more money will flow in from emerging market funds. This is so because the Athens stock exchange would be a bigger fish even if the emerging market pool is smaller.

The recent announcement by Russell Indexes, an index provider with $3.9 trillion tracking its market indices, about the relegation of the Athens bourse to the emerging market league fuelled the discussion. Another two major index providers – namely MSCI with some $7 trillion tracking its indices, and FTSE with $3 trillion – have put Greece on review or a watch list.

But strategic analysts who are familiar with the issue say it will take a Greek exit from the euro, not a likely scenario any longer, for other major index providers to relegate the Athens bourse to the emerging market league. This is so, they argue, because the country’s per capita income is higher than the cut-off for emerging markets. Moreover, emerging market countries tend to grow fast, have a relatively low public debt-to-GDP ratio and their companies usually carry a low debt burden since credit is not ample and cheap.

In other words, the Greek stock market does not satisfy several basic criteria to be relegated to emerging market status to begin with, according to them. Of course, this did not stop Russell Indexes from reclassifying it on the basis of a three-year market risk review process, which showed that Greece did not meet some macroeconomic and operational criteria associated with the developed market universe.

It is hard to say whether other major index providers will follow Russell’s example so that the theory of which category is suitable for the Athens bourse can be tested. With a lot of retail investors licking their wounds from huge bank share losses, it is clear that only foreign portfolios can put the Athens bourse on an upward course and create the conditions for more IPOs (Initial Public Offerings), rights issues and other capital raising exercises so that companies can fund investments.

In this regard, removing the country’s debt overhang and attaining a primary budget surplus are necessary conditions for a lift-off. However, it is up to individual companies to become more efficient and export-oriented in order to help in their own recovery, irrespective of the bourse’s status.

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