Current stock market rally is neither excessive nor unjustified

High returns help draw investors’ money into the Athens Stock Exchange (ASE), and money brings even higher returns. The ASE has been on an upward path for almost five months now, with the general index gaining 55 percent since the market reached a low point on March 31. Helped by the international markets, most of which are also at year-highs, the ASE is attracting an increasing number of investors. It is difficult to ignore the lure of high returns, especially in this period when very low interest rates are the norm and there are few alternative products to invest in. According to brokerage houses, investors’ accounts that had lain dormant for years are being activated again and increasing amounts of capital are being put up to buy stock. The impressive rise in transactions over the past few months is a foolproof indicator that investors are making a comeback. Despite the summer vacation, daily transactions are soaring, easily reaching 200 million euros, whereas they were struggling to reach 50 million a few months ago. The re-entry of retail investors and the inflow of new capital are also reflected in equity and balanced mutual funds. According to data provided by the Union of Institutional Investors, in the period from July 31 to August 18, 33.9 million euros were invested in domestic equity funds, while another 80 million were invested in domestic balanced funds. The return of investors naturally leads stock valuations increasingly higher. The ASE’s precipitous fall over a period of three and a half years – 76.95 percent between September 17, 1999 and March 31, 2003 – led to a decline in valuations to very low levels for several listed companies. For them, a strong rebound, as soon as circumstances and investor psychology allowed, was inevitable. According to the previous analysis, the impressive rise in share prices over the past five months is neither excessive nor unjustifiable: A big decline was followed by a big rise. Of course, this logic is relative and not universally applicable. Excesses, speculative games and bubbles are part of the market, although, in normal circumstances, they should be the exception and not the rule. The ASE’s current buoyancy is mostly the result of strong markets internationally and improved investor psychology. Brokers note that the general index is not on the wild upward course it was during the summer of 1999. It now allows investors to make their profits, there is a pause at each new level and, as soon as there is an external stimulus, the index rises again. The bourse and its players are also pinning great hopes on the Athens 2004 Olympics. A rally right up to the Olympics is a scenario that has already started making the rounds of the ASE. A crucial safeguard against a wildly unpredictable market is the so-called T+3. That is, the obligation by share buyers to either pay the full amount within three working days after buying the shares or to sell them. Three days is a very short time for someone to engage in margin-buying without undertaking incredibly high risks. This deadline effectively terminates the practice, or its less responsible features. Now margin-buying can no longer let the markets spin out of control. Many analysts believe that the market watchdog’s crucial mistake in 1999 was the total lack of control over margin-buying. Anyone with a capital of 5-10 million drachmas (about 15,000 to 30,000 euros) could buy shares many times their value. Brokerages funded this practice out of their own capital or sometimes even other accounts. If the authorities had done their job, the market would have reacted differently.