After a good five years during which Greek listed firms bolstered their profitability, the prospects for 2005 and 2006 are rather uncertain, Marfin Bank says in a report titled «Investment Strategy 2005.» The study points out that Greek stock market valuations are at rather high levels, not just in relation to the rest of Europe but also in comparison with previous years. The price-to-earnings (P/E) ratio of high-capitalization stocks is on average 20 percent higher than in European markets, when their historical average was 12 percent lower. This premium becomes even larger if the fact that profitability has been concentrated in a small number of firms is taken into account. Even though the level of 2,800 points on the Athens Stock Exchange (ASE) general index is considered fair, due to the higher average yields of the eurozone’s 10-year benchmark bond (3.5 percent in 2004 and 4.1 percent in 2005) and the projected profit performance of firms, the introduction of International Financial Reporting Standards (IFRS) this year is casting a cloud of uncertainty. The reason is that IFRS will clarify the true picture of balance sheets, on which banks will have to write their unfunded social insurance liabilities, as well as contribute to the formation of a single pension fund for their employees. Further possible unfavorable factors for the performance of the stock market in 2005 are considered the likelihood of higher provisions for bad debts and the uncertain completion of the restructuring of companies, according to Marfin Bank. The study argues that investors are now discounting a series of scenarios that are important but particularly difficult to realize, such as the resolution of chronic structural problems, maintenance of consumer credit at high levels, smooth transition to IFRS, resolution of banks’ social insurance issue without an upset in their capital adequacy, and the successful management of their non-performing loans – all in an extremely fluid international environment. Taking into account the above factors, Marfin recommends that investment companies with a capitalization of over 90 million euros maintain low debt burden and high valuations, as well as strong cash operating cash flows, high dividend payouts and growing profitability from investments in emerging markets abroad. Due to higher risks in the international environment, Marfin proposes that they adopt a medium-risk portfolio with no more than 27 percent of capital invested in stocks, with 20 percent in Greek shares. The introduction of IFRS is seen as a higher risk factor, particularly for smaller firms. Moreover, the economy’s growth rate is projected to decline to 3.2 percent from 3.9 percent in 2004 with the end of Olympics projects, while inflation will remain high. And the slowdown of the economy is projected to be even be greater than expected as the government pursues its fiscal adjustment policy, investment in public projects falls and consumer credit and spending also slow down.