The Athens Stock Exchange (ASE) put on a stellar performance in 2003 and continued its march toward higher levels in the first week of 2004 largely fueled by foreign money buying into Greek equities. Although this development is welcome and is widely expected to continue into this year, a few local fund managers warn this is bearish for the ASE in the long run. Are they right? According to the most recent figures released by the Central Securities Depository on Friday, non-residents continued to increase their positions in Greek stocks in December 2003. They accounted for 39.4 percent of the total capitalization of the Athens Stock Exchange as of December 31, 2003 compared to 37 percent in December 2002, 32 percent in January 2002 and 27.8 percent in May 2001 when the ASE was upgraded to a developed market It should be noted that the capitalization of all listed companies stood at about 84,600 billion euros at end-2003 versus 65,763 billion at end 2002, meaning non-resident investors increased positions, mainly in blue chips, while the stock market was rising, confirming their part in its advance. Of course, the increased participation is partly explained by the decision by Alpha Bank and Piraeus Bank to place part of their treasury stock with mostly institutional investors abroad. The placement of equity stakes in state-controlled lottery operator OPAP and Public Power Corporation (PPC) with foreign funds also contributed to this effect. Of course, the delisting of cigarette maker Papastratos as well as Panafon-Vodafone later, owned by a subsidiary of Altria Group and Vodafone Group respectively, should have a negative impact on the ASE on the holdings of non-resident investors but should be counterbalanced by the likely purchase of Greece’s General Bank by French bank Societe Generale. In addition, there is speculation that some large foreign funds have been building positions in telecoms operator OTE and other listed companies. At the same time, local retail and institutional investors have seen their shares slipping. This pattern of investment behavior is consistent with past experience, showing that foreign institutional funds lead the race, followed by domestic institutionals, with Greek retail investors getting in late in the last leg of a rally. Still, the increased holdings of Greek equities by non-resident investors has not been welcome by some local fund managers who express concern that this is going to lead to a mass exodus down the road, keeping the Athens bourse in the doldrums for many years to come. «Foreign inflows are good for as long as they last. At some point later comes the moment of truth when these funds take their profits and go elsewhere. It would be unwise for anybody to think they will hold on to their Greek bank shares forever,» says an executive at a medium-sized private bank who has also been a fund manager at a well-known mutual fund company of a major US bank. «This (selling) along with an expected economic slowdown from 2005 onward also supports my conviction that one should be long-term bearish on the Athens Stock Exchange.» The executive also points out that some are hedge funds interested in riding the market trend prior to the general elections, while others are simply here to bet on a rally as the 2004 Olympics near. Positive factors Is this the entire picture? Not really. First, some non-resident holdings belong to offshore companies, owned in some cases by the major shareholders of listed companies for different reasons. These legal entities may buy or sell company shares at different points in time; it is rather unlikely they would sell all their holdings and walk out. Some other non-resident legal entities have major or strategic stakes in local companies and are therefore unlikely to liquidate unless they choose to abandon their investments. Second, it is true that foreign funds own mainly equity stakes in Greek blue chips, for example banks, betting that rising earnings will push the Greek bank shares closer to set target prices for them to make a nice profit. Still, one should not rule out the possibility that the supply will be met by a different type of demand at a lower price, coming either from domestic or other non-resident funds. Third, it is too early to predict how things will unfold internationally in a couple of years. If we have seen the bottom of the three-year stock market decline and the major economies continue to recover, one should expect more, not less, foreign funds, seeking growth opportunities in the peripheral stock markets, such as the ASE. In short, one cannot not rule out the bullish scenario. Fourth, a majority of Greek companies are indeed small in terms of capitalization to attract the interest of large funds. However, most of them have also done very little to sell themselves abroad. So, there is leeway for attracting foreign small-cap funds and later large funds provided that these listed midsized companies do a good job in delivering on their earnings promises. Fifth, it is normal, as time goes by and memories of the bubble recede, to expect greater participation by local investors. This should provide some cushion in case of a mass exodus by foreign funds in the future. The increased participation of foreign funds in the local stock market should be viewed positively, since it is a vote of confidence in the prospects of some key listed companies and the economy in general. Although it is true that this foreign buying may give way to selling later on, there is good reason to believe this will not bring on long-lasting bear market as feared by some. In any case, company fundamentals will play a significant role in shaping the direction of the foreign fund flows.