Greek stocks ought to be more popular with foreign investors

At the same time that Greek investors are slowly but steadily showing greater interest in foreign equities, bonds and even commodities, foreign funds are taking advantage of partial flotations of state-controlled companies and private placements by other listed companies to increase their holdings in the local market, exerting greater influence on the Athens bourse’s course. This contrasts sharply with negligible foreign direct investment and shows that Greek companies can do much more to attract foreign portfolio investments. As local retail and institutional investors continue to stay largely on the sidelines, foreign funds have been building their positions in local equities. According to the Athens bourse’s latest figures, foreign institutional investor holdings accounted for 29.91 percent of the total market capitalization of the stock exchange at end-October. Deutsche Bank’s decision to sell its 9.3 equity stake in EFG Eurobank to foreign and local funds as part of its strategy of divesting from holdings in other listed companies has done little to change the balance since some 80 percent of the 29.2 million shares were reportedly sold outside Greece. So, almost two-a-half years and since the sell-off that followed the upgrade of the Athens Stock Exchange to the league of developed markets by MSCI (Morgan Stanley Capital International), a different breed of foreign funds has started investing in local equities, providing some much needed liquidity to an otherwise small and relatively illiquid stock market. More attention on macro Analysts, bankers and fund managers in Greece and abroad agree that there is a lot of capital out there that Greek companies should try to tap into it. Although macroeconomics is not the dominant factor in attracting investor interest that it used to be during the emerging-market era, the problems large eurozone economies, such as Germany, face have convinced many well-known investment houses to pay greater attention to each country’s macroeconomic record than they did a couple of years ago. It has even persuaded some of them to take a look at each national market separately and not just focus on the companies making it to their realm of the pan-European sector. To this extent, Greek companies should have been more successful in attracting foreign interest as the local economy has been battling it out with Ireland for first place in GDP growth for a number of years and has the distinct advantage of hosting the Olympic Games next year. A number of foreign fund managers, especially those based in the USA, say in private they have not been alerted to these developments for some time and a number even wonder why they haven’t been. Small free-float Moreover, many Greek large-caps have been penalized for their relatively small free-float. This partly explains why inflows from index funds tracking the MSCI stock market indices turned out to be lower than expected following the Athens bourse’s upgrade to a developed market in 2001. MSCI adopted a free float-based methodology for the construction of its indices that year. The tendency by some major banks, such as Alpha Bank and Piraeus Bank, to sell their treasury stock to build up their Tier I capital base and the State’s placement of minority stakes in state-controlled companies, such as OPAP and Public Power Corporation (PPC), with institutional investors to raise money to plug some budget holes has increased the free-float of some large-caps, leading to larger weightings in some known stock market indices, and prompting some foreign index funds and quasi index funds to buy more of their shares. Thanks to the free-float changes, Bank of Piraeus stands to benefit from MSCI’s upcoming quarterly review and Citigroup predicts indexers will buy some 1.6 million shares of Piraeus as a result. Of course, the increase in free-float can only partially address the issue of liquidity for the local market. One of the reasons foreign funds do not buy into some good local listed companies is due to concern they will not be able to sell within a reasonable time without driving their shares sharply down if circumstances warrant it. Buying stocks of companies worth 20, 30 or even 50 million euros is something common for foreign funds but no fund will choose to do so if the fund managers know they will need 10 days’ trading volume to liquidate their position. In this respect, increasing the free-float in known large-cap companies, such as EFG Eurobank may be a blessing in disguise, even if it takes place by divesting of a major foreign partner. This would attract greater interest from some foreign funds and even force the bank to adopt a more aggressive policy toward pursuing foreign funds. Still, the biggest obstacle to bringing in more foreign portfolio investment is the relatively small size of Greek companies in the pan-European context. Organic growth is a solution when there are no other alternatives, especially for large-caps but even high revenue and earnings growth rates do not seem to be enough. Merger and acquisition activity (M&A) is the medicine if the proper conditions, such as limited overlapping of activities and a high degree of complementarity, are in place but regulations and societal conditions do not seem to favor it. Another obstacle is the fact that most local listed companies continue to use only Greek GAAP in their financial statements. Although a number of them have cleansed their balance sheets and have prepared for the eventual adoption of International Accounting Standards, only a small minority is using IAS today, making comparisons with their foreign peers more difficult for foreign fund managers. There is no question that company fundamentals will continue to play a very important role in attracting foreign funds. Nevertheless, macroeconomics, special events, such as the 2004 Olympics, free-float and market liquidity, firm size and transparency in financial statements will also continue to play important roles. Foreign funds have increased their holdings in the local bourse but are nowhere near what they would have been had local firms realized the potential and adopted a more aggressive policy to woo them. It is a numbers game, after all, and these funds have ample liquidity to invest, with major central banks pumping a great deal of money into the system to keep the economies going.