Foreign investors continue to drive Athens bourse upward
The Athens Stock Exchange has been a top performer in the developed markets league in the last two years, largely thanks to foreign fund buying. Although grateful, most local market participants continue to follow foreign funds in disbelief while seeking an answer to a simple question. Why is it that these guys continue to build positions in large-cap stocks widely considered to be overvalued? The answer may not be simple but may help highlight why most domestic equity funds failed to beat the benchmark local stock indices for yet another year in 2004. The Athens Stock Exchange managed to rank second among all developed markets last month, according to MSCI (Morgan Stanley Capital International) data. The MSCI-Greece index recorded gains of 4.26 percent in January, falling behind Portugal’s 5.17 percent but ahead of the Netherlands’ 3.81 percent and France’s 2.5 percent. It was a good month for Greece’s heavyweight companies, coming on the heels of a stellar performance in the last two years. It is noted the Greek MSCI stock index ranked third among all developed markets in 2004, returning 31.06 percent versus first-placed Austria’s 57 percent and second-placed Norway’s 36.2 percent. With the majority of local retail investors on the sidelines, still licking their wounds following the 1999 stock market crash, it is no coincidence that the Athens bourse’s out-performance has to be attributed to foreign buying. Figures from the Central Securities Depository show that non-residents held stocks accounting for 36.093 percent of the total capitalization of the Greek bourse, easing from 36.44 percent at the end of 2004. It is higher in blue chips, where 41.89 percent of the FTSE/ASE-20’s total capitalization was in non-resident hands compared to 22.94 percent in mid-caps. The dominance of foreign funds in everyday trading on the Athens bourse, especially in large-caps, is undisputed and has to do as much with company specifics as with other factors. Starting with macroeconomics, Greece’s slower GDP growth, seen at between 2.8 and 3.6 percent this year and next, down from 3.8-3.9 percent in 2004, is still well above the EU-15 average. This bodes well for top-line company growth, setting the stage for high single-digit or double-digit growth in sales in 2005 and 2006. At this stage, at least, keeping the economy growing is more important than genuine concerns about the country’s large fiscal imbalances. The favorable growth background is considered particularly important for heavyweight banks, expected to deliver strong loan volume growth in the 2005-2006 period. Although the introduction of IFRS calls for immediate action to take care of the uncovered pension liabilities issue, which is mainly the problem of Emporiki Bank, foreign investors continue to focus on estimates of double-digit earnings per share growth in the 2005-2006 period. The increased contribution of Balkan subsidiaries to their bank earnings lends more credence to their story as well as being a relatively easy and safe way to gain exposure in the promising emerging markets of the wider region. The fact that it is difficult to find similar growth stories in other European banking markets has also helped as the war of spread margins still rages in Spain while slow GDP growth does little to help the majority of listed Italian banks. Moreover, the increase in capitalization and liquidity and the hefty returns earned by foreign funds which have taken position in these bank stocks in the last couple of years appears to have lured in other funds, including hedge funds. The placement of tens of millions of their shares with foreign institutional investors in the same period has also increased their visibility on the radars of foreign funds and induced some of them to adopt passive strategies to include them in their portfolios. Undoubtedly, most large banks trade at a premium vis-a-vis their European peers on predicted 2005 earnings, which fade when 2006 profit forecasts are factored in. This is the reason many local fund managers, brokers and others recall when they express concerns about overvalued stocks. However, a flashback shows they used to voice the same concerns a year or so ago but thanks to better-than-expected earnings announcements, bringing valuation to earth, some bank stocks surprised on the upside. A more or less similar story played out with other stocks, such as the state-controlled OPAP lottery, where unhidden value was discovered by a CSFB analyst, drawing the attention of foreign funds and propelling the stock to new historical highs. The increased coverage of Greek stocks by foreign investment houses seeking to a get a piece of the pie from the prospective underwriting and advisory business in Greece, and the ample liquidity abroad coupled with the increased appetite for risk in exchange for extra returns by foreign funds also helped provide a boost to the local market. According to conservative estimates, some 300 foreign funds are active on the Athens bourse while others put the number between 400 and 500. At the same time, Greek retail investors continued to withdraw money from domestic equity funds with net outflows reaching 450 million euros in 2004, the second consecutive up year for the bourse. Some local fund managers point to this factor to justify the disappointing performance of their fund category last year whereas only two domestic stock funds beat the General Stock Market Index and none the blue chip FTSE/ASE-20 index. Are they right? Of course not. Their funds’ underperformance had more to do with poor asset allocation decisions than anything else. Nevertheless, net outflows, if they continue, constitute a barrier to advancement for many stocks which cannot tweak the attention of foreign funds. Does it mean the Greek market is vulnerable to a potential sell-off by foreign funds? Although such a development cannot be ruled out, it will be triggered by disappointment over corporate financial results or the failure of restructuring or a major event abroad. Assuming most fund managers act rationally, one does not expect such a development if Greek firms, spotted by foreign houses, continue to deliver superior results. If they had not, they would have been punished by both foreign and Greek funds. That, at least, should have been the case, but waiting for this to happen is not clearly the best strategy as demonstrated by the local equity funds’ lackluster performance in 2004.
