While the vast majority of Greek retail investors shy away from investing on the Athens bourse and local institutionals are busy trying to figure out how to cope with an almost constant stream of redemptions by holders of domestic equity fund shares, foreign investors continue to increase their exposure in Greek equities. Do they see something we are missing? Expectations dashed Undoubtedly, the high expectations for structural economic reforms linked to the March general election outcome have not been fulfilled as the new conservative government devoted too much energy on foreign issues (Cyprus) and other domestic issues (elections for the European Parliament in June and the Olympics). Moreover, its emphasis on the auditing of the fiscal accounts and the ensuing political quarrels as well as the strong statements against Greece by high-level EU officials did not help either. Still, the official estimates for a higher-than-expected budget deficit in excess of 5 percent of GDP (gross domestic product) this year, the likelihood of early general elections next year and the government’s decision to battle it out with some dominant business interests have failed to scare away foreign investors and speculators. Even the warnings of some international credit agencies, such as Standard & Poor’s and Fitch, did little to change the landscape as evidenced in both the government bond market and the Athens bourse. Steady bond yields Following a short-lived widening of the 10-year yield spread between Greece and Germany to 20 basis points from 18 points prior to the announcement of the new official budget deficit estimates spanning the 2000-20004 period, the 10-year spread has returned to pre-announcement levels. (One percentage point equals 100 basis points.) A statement by an official at Moody’s that her credit agency had no plans to change Greece’s rating is widely regarded as the main reason behind the tightening of the yield spread. This does not mean that the Greek debt paper is viewed as favorably as it was prior to the results of the auditing, although there was always suspicion in the market that the true budget figures were somewhat worse than the official ones. A number of foreign houses have cut their exposure, recommending underweight positions in Greek bonds because of the deterioration of public finances. It is noted that the majority of Greek government paper is in foreign hands, with 14 out of 19 primary dealers in the local secondary electronic bond market being major foreign banks. Ample liquidity looking for a pickup in yields in international markets during a period of high oil prices thought to have a negative impact on economic growth may offer a convincing explanation of the tight spread over Germany. Greece’s ability to rein in its fiscal accounts may also partially explain the move. In general, government bonds – known as govvies in the market – tend to do well during periods of low money rates and low inflation usually associated with trend or sub-trend GDP growth rates. Stronger ASE presence While foreign players continue to dominate the local secondary government bond market, the influence of their counterparts on the Greek stock market appears to be growing stronger and stronger. According to the latest figures provided by the Central Securities Depository SA, the stake of non-resident investors, namely institutionals, individuals and legal entities, in the 140 companies comprising the broad FTSE/ASE-140 stock index increased to 35.11 percent at end-September from 34.44 percent at end-August. Foreign institutional portfolios upped their stake to 24 percent in September from 22.68 percent in August. As one may suspect, the stakes are much bigger in bourse heavyweights, accounting for more than 40 percent of the 20 blue chips in the large-cap FTSE/ASE-20 index. In addition, they account for more than 50 percent of the daily turnover on the Athens bourse according to EFG Securities estimates. At the same time, the stake of Greek retail and institutional investors continued to decline. Individual Greek investors accounted for 25.5 percent of the FTSE/ASE-140 market cap at end-September from 26.79 percent on August 31, whereas local institutional portfolios held 13.9 percent last month compared to 14.8 percent in August. (Individual investors have yet to recover from the trauma of the stock market’s three-and-a-half year decline [September 1999-March 2003] that followed the 1998-99 bull market. The vast majority of accounts opened back then have remained idle over the past few years and few new accounts have opened.) Outperformers The strong preference of foreign investors for a relatively small number of Greek stocks is evident in their year-to-date out-performance. OPAP, the state lottery, has returned more than 40 percent year-to-mid October, followed by Motor Oil with about 30 percent, National Bank of Greece and CosmOTE with 29 percent, Titan Cement with some 28 percent, and EFG Eurobank Ergasias with about 27 percent. On the other hand, companies attracting fewer foreign investors, such as Intracom and Agricultural Bank of Greece, have performed poorly, shedding more than 35 percent of their value since the beginning of the year. Undoubtedly, Greece’s entry into the eurozone has eased fears of unsustainable macroeconomic imbalances as evidenced by the foreign investors’ indifference to the country’s huge budget deficit and public debt-to-GDP ratios. Even though lax fiscal policies frequently lead to restrictive measures hurting economic growth and corporate profits, their stance shows they are little concerned about it. Some may accept the government’s optimistic expectation of 3.9 percent growth rate next year, others may still be happy to see the economy growing at above-EU average growth rates, closer to 3.0 percent. Whatever the reason, macroeconomics seem to play a minor role. On the contrary, the increased exposure of foreign institutional investors in the Greek stock market, which started essentially last year, seems to reflect a number of other issues. First of all, the successful share offerings last year by some heavyweight stocks, such as National Bank, Alpha Bank, EFG Eurobank Ergasias and Piraeus Bank, helped acquaint foreign investors with them and improved the liquidity of their stocks. The same was true with electrical utility Public Power Corporation (PPC, also known by its Greek initials as DEH), OPAP and CosmOTE. The improved liquidity allowed other foreign investment vehicles, such as hedge funds, to join the party since they could get in and out of the stock fast. Bank prospects Moreover, better-than-expected financial results and the convincing prospect of rising profitability at the major banks in the next few years, spiced with a couple of restructuring stories, mainly in the case of National Bank of Greece under Arapoglou and OTE under Vourloumis, acted as a catalyst for getting more inflows into the Greek market. With the Olympic Games putting Greece under the world spotlight, a number of foreign funds pursuing passive investment strategies sought to reduce their underweight positions in the Greek market, adding more fuel to the fire. So, what do they see that we are missing? They see the prospect of further earnings upgrades as profits are forecast to grow under reasonable assumptions of GDP growth rates, the potential of some restructuring stories unlocking value for shareholders, and a greater commitment from the state to streamline its public finances and stick to a moderate program of privatizations. Are they right? Time will tell. Are they correct? Well, the stellar-to-good performance of some of their stock picks so far speak for themselves.