What a difference a year can make. This time last year, the Athens Stock Exchange had not just come out of its third straight year of losses but passed into history as one of the worst-performing developed stock markets worldwide. It is therefore no surprise that pessimism reigned and the majority of market participants did not have high hopes. They were wrong. This time, the Athens bourse comes out of 2003 as one of the top-performing developed bourses in the world, and most pundits believe 2004 will turn out to be another good year for the local stock market, in expectation of a positive impact from the general elections and the 2004 Olympics. Are they right? Indeed, the Greek stock market recorded losses in excess of 35 percent in 2002 but managed to largely offset them last year. According to Morgan Stanley Capital International (MSCI) figures, the MSCI-Greece stock index offered the second-best return among developed bourses in 2003, with a gain of 35.79 percent in 2003. Norway ranked first with 38.13 percent, and Germany third, posting a 33.23 percent return. As far as 2004 is concerned, the majority of brokers, analysts and institutional investors appear to be more upbeat, expecting a gain in the order of 10 to 20 percent. The most optimistic among them put the target even higher, between 30 and 40 percent. Of course, forecasting the future has never been an easy exercise, especially with volatile stock markets. Therefore, the picture is not clear-cut. Undoubtedly, the Athens bourse can count on another year of strong economic growth, projected above 4.0 percent, to boost the sales and profits of listed companies. Still, strong economic growth was present in the past few years, but its positive impact on corporate sales did not translate into a comparable rise in corporate earnings. The exception was 2003, when the 10 percent increase in turnover boosted pretax profits by 19.2 percent in the first nine months of the year. However, 2004 should be more like 2003 than 2002 or 2001 given the limited dependence of listed corporations on volatile trading income and efforts made to restructure and address their cost base. Small investors return With inflation remaining above 3 percent and nominal money market rates at record lows, retail investors will have to settle for negative real deposit rates for yet another year or become bolder and start diversifying by placing some money directly or indirectly via mutual funds on alternative investments, including stocks. On the other hand, many local retail investors appear to have lost confidence in the bourse after having suffered steep stock losses in the past few years. Still, history shows that local retail investors are more momentum players than anything else and tend to participate more when stock gains are reported. This means there should be more participation if trading becomes more vibrant amid a rising stock exchange although comparative valuations show most Greek heavyweight index companies are no longer cheap vis-a-vis their European peers. This is to be expected after an exceptional year which saw the stock of the National Bank of Greece rise by 70 percent in 2003, Alpha Bank’s by 109 percent, Piraeus Bank’s by 58 percent, EFG Eurobank’s by 36 percent and Emporiki’s by 37 percent on the back of earnings upgrades and a rebound from cheap valuations. The average gain of the large five Greek banks stood at 57 percent last year, beating the FTSE Eurotop 300 banks index by 42 percent. Nevertheless, a number of analysts point out there is potential for further earnings upgrades, especially in the heavyweight bank sector in 2004, paving the way for more attractive valuations and higher stock prices. State lottery OPAP and the Public Power Corporation (PPC) also did pretty well in 2003, a year that saw OPAP’s third flotation and PPC’s second, with foreign institutional investors grabbing the lion’s share. Cash- and dividend-rich OPAP is considered a relatively safe bet despite its stock’s rally in the last month or so. PPC can count on the projected increase in demand for electricity and its monopoly status to deliver profits. Of course, there were other index heavyweights, such as telecom operator OTE, which in 2003 which were attractively valued but failed to capture investors’ interest as their earnings continue to disappoint. A number of market participants believe heavyweight OTE could turn out to be the bourse’s turnaround story in 2004 but this depends largely on the initiatives and the credentials of the new management team expected to take over after elections. Foreigners to the rescue There is no doubt that the Athens bourse would not have been the second-best performing developed market in the world in 2003 if it had been left to local institutional and retail investors. Foreign funds have been constantly increasing their holdings in Greek index heavyweight companies for months now, providing liquidity and helping push stock prices closer to fundamentals. The majority of these foreign funds appear to be here for the long haul and pay greater attention to fundamentals and valuations than momentum. To the extent that upbeat analyst reports are confirmed by rising profits and the international economic and market environment turns out to be improving according to consensus estimates or better, foreign funds will continue to play a major role in the local bourse, with local institutional investors following their lead. The latter appear to have more liquidity than before after receiving interim dividends and selling their stock holdings in delisted companies such as cigarette maker Papastratos, or candidates for delisting such as Panafon-Vodafone. Of course, general elections and the 2004 Olympics are the two main events of the year and will definitely leave their mark on the bourse. Although some foreign hedge funds may participate in any pre- or post-election stock market rally, it will most likely be local funds and retail investors who will play the central role. It is true that the market cares more about the content of the economic program and the ability of the new government to apply it rather than the colors of the winner. The bolder and stricter the program is in dealing with public sector inefficiencies and structural rigidities in input and output markets, the better it is for the market. Therefore, the market may rally before the next elections, likely to be held in March, but this will happen if the winner is clear and manages to convince the market of its intention to overhaul the public sector and impose fiscal discipline. Nevertheless, though some kind of repetition of the 2000 pre-election stock market push should not be ruled out, it is rather unlikely this time round. The 2004 Olympics will turn the spotlight on Greece and therefore make it more widely recognized. This will undoubtedly help the local bourse and the economy – and even more so if the Games are ruled a success. So, there should be some impact beforehand but the harvest will take place afterward and it is difficult to say what it will turn out to be. All in all, 2004 is more likely to turn out to be another good year for the Athens bourse. This will not be determined so much by the election outcome or the Games as by the ability of listed companies, especially banks, telecoms and industrials, to deliver on earnings and pleasantly surprise the market. It will also depend on the international economic and market conditions projected to improve this year.