Is the ASE revival sustainable?

After three consecutive years of steep declines, the Athens Stock Exchange appears to be back on its feet, recording the highest year-to-August 15 return among all developed markets. Although hefty gains on major world bourses since mid-March and the improved earnings outlook of Greek banks have played a significant role in reviving the local bourse, market participants and others also point to general elections as a source of strength. If they are right, then the best performing developed stock market has more sunny days ahead, assuming world equities do not spoil the party. If someone was asked whether the Athens Stock Exchange could have staged such a comeback after hitting multi-year lows in March, the most likely answer would have been an astounding «No.» Yet, the market has managed to defy most pundits and hit a fresh year-high last Thursday. It is the best performing market both in terms of quarter-to-August 15 and year-to-date figures. According to data published by Morgan Stanley Capital International (MSCI), the MSCI-Greece index gained 25.25 percent in local currency terms and 34.33 percent in dollar terms since the beginning of the year, the highest among developed markets, followed by Norway with 22.38 percent and 14.92 percent respectively, and Sweden with 19.89 percent and 27.43 percent respectively. What seems at first to have been a combination of a technical rebound of an oversold market and buying by real money accounts lured by cheap valuations, has turned into a sustained rally that has raised many eyebrows along the way. Although nobody disputes the positive contribution of higher first-half major bank financial earnings to the improved investor psychology and fundamentals, enticing foreign institutional buying, some link the bourse’s performance to the prospect of general elections. It is noted that three of the four major banks posted better-than-expected first-half profits while another bank disappointed. Election pressure Greek elections are scheduled for next spring but it is not uncommon for the elections to be held at any time in the last 12 months leading up to the deadline should it suit the political party in power. With the ruling socialist party PASOK trailing the conservative New Democracy party by five to 10 percentage points, a growing number of analysts and commentators believe PASOK has no option but to increase financial assistance, promising higher pensions and salaries to a wide range of lower income groups and helping to prop up the Athens bourse to woo more middle-income voters in addition to campaigning on its foreign policy successes. With expenditures already running well over this year’s budget target, the government has embarked on an ambitious program to part-float state-controlled enterprises and privatize some others in order to raise 3.0 billion euros. At the same time, it is trying to collect more revenues by settling pending tax cases and others in arrears by offering favorable terms in order to fill the gap and finance its social agenda. Analysts and others who share the view that a vigorous bourse heading toward elections is an invaluable tool for a successful election outcome may be right but the real question is: How do you keep a bourse, which is looking more to major European equity markets for direction than before, alive and kicking for months? The answer is: by feeding it with positive news about M&A deals and privatizations, by injecting some cash via investment entities associated with state-controlled pension funds and by hopefully counting on a stock market rally abroad. Market talk of stock-buying from investment vehicles associated with state-controlled portfolios and some private ones has been around for a while but nobody can say for sure whether this is real or simply reminiscent of the events prior to the 2000 elections. Stock purchases by DEKA, the Finance Ministry’s portfolio management arm, have been well documented and are generally perceived to have been aimed at boosting the Socialists’ electoral chances by shoring up the Athens Stock Exchange in the months leading up to the April 2000 elections. Finance Ministry and high level socialist party officials have denied the charges. World markets key Even if there is a grain of truth in these allegations, analysts and brokers agree that the stock purchases would not have been enough to push the bourse much higher without getting a helping hand from rebounding world equities and the more active participation of domestic institutional portfolios and retail investors. It is generally believed that local institutional portfolios were heavily underweight equities and were caught off guard by the market rally. In rushing to increase exposure, they too helped push the bourse to much higher levels than would have been the case otherwise. Moreover, it looks as if bank-controlled portfolios have become more interested in the stock prices of a number of listed firms that they have lent to in the past. Whatever the real reasons behind the bourse’s revival, it is absolutely certain that the prospect of general elections has been the catalyst. On the one hand, it is in the best interest of the ruling party and the government to see the stock exchange heading even higher because this means it will be easier to raise the money required to fund the social agenda as well as make tens of thousands of stockholders who have suffered three consecutive years of losses happy. Even if the ascent is partly due to some propping up by state portfolios and other friendly «powers» in connection with the controlled flow of positive news about potential M&As, it is clear that this has helped shape market expectations favoring higher price levels. Market participants are quick to point out that another factor making the prospect of elections so dear to the bourse is the commonly held opinion that no matter which political party wins, the new government will be forced to take unpopular, painful measures to deal with the economy’s structural problems early in its tenure. The conservatives are regarded as more bold and determined to deal with structural economic issues, such as the social security malaise, controlling budget spending and speeding up privatizations, but that they lack substantial backing in labor unions and elsewhere. A win-win situation In that respect, no matter which party wins, it is still a win-win situation for the bourse, which can also count on a high GDP growth rate and the 2004 Olympics for an improvement in corporate profits in the quarters ahead which lower valuations and justify higher share prices, they say. There are a few analysts and bankers out there, however, who warn against rushing to draw early conclusions. They say once the date of the elections is announced, investors tend to become nervous and they point out that fiscal policy is usually lax prior to the elections, raising concerns about the day after. To them, current exuberance is unjustified and a strong bourse cannot win elections, especially when the rally comes after such a long beating, resulting in the destruction of billions of euros in wealth. Although both sides have made some credible arguments, it looks as if the optimists have the upper hand. Market volatility should be expected to pick up as elections draw closer. But a steady flow of positive earnings reports, coupled with some action on the privatization front and the healthy economic growth rate – many times that of the eurozone average – should provide the background needed for the Athens bourse’s outperformance vis-a-vis the foreign bourses. Elections indeed matter and help the Athens bourse outperform. Whether this outperformance will take place in a rising or a falling market, however, is yet to be seen.