ASE: Cautious optimism

The Athens Stock Exchange (ASE) continued to disappoint investors in 2001, with the overwhelming majority of share prices recording considerable losses. Many hopes had been placed on the upgrading of the ASE by foreign institutional investors into the category of developed markets in May, but these hopes were disappointed as the liquidations of those withdrawing from an emerging market were not even closely matched by developed market funds. Expectations for the bold promotion of structural changes in the economy still await fulfillment. The privatizations of Hellenic Shipyards and the Hellenic Industrial Development Bank (ETBA) were the only ones to be approved but are still to be implemented; Olympic Airways remains in the hands of the State. The announced tax reductions lacked boldness; market liberalization is wobbling along and the mighty social insurance problem is still awaiting the beginning of reform. The business deal of the year, the merger of the country’s two largest banks, National and Alpha, did not offer much help to the stock market and instead aroused strong skepticism regarding the prospects for the functional merger of the two, even though everyone agrees that increasing the size of enterprises is a sine qua non for improving their competitiveness in the eurozone environment. At the same time, low investment education remains among the chief reasons for the slump in the stock market, along with the tendency to blame others for enticing investors into non-profitable choices. The negative international economic climate was undoubtedly the most important factor in 2001. The recession which set in after the first quarter of last year is still there, despite the eleven successive cuts in the intervention rates by the US Federal Reserve. Indeed, the blow to market psychology by the September 11 attacks in the US worsened the situation, as many believed its economic impact would be so strong that a long healing process would have to follow. But the instant reaction of US monetary and fiscal authorities had a beneficial effect, eventually leading international stock market indices to higher levels than in September. It is, nevertheless, rather utopian to expect a recovery in just a few months, particularly in the US, where total household debt has reached historical highs and excess capacity of businesses stands at unprecedented levels. A sound recovery of the world economy is likely to originate in stronger demand for products and services of emerging economies (China, India and Russia), while the physical presence of the euro in transactions can contribute to an acceleration of growth in the eurozone. As regards prospects for 2002, we have to take into account certain «objective» facts. First, the Greek stock market is now reasonably priced and at large discount compared to other developed markets. There are many companies with low, two-digit P/Es, even with the projections of low profits for 2001. The stock market valuations of most companies have fallen near their accounting values. Many dividends are higher than the best interest rates. Market capitalization is similarly attractive with the levels of 1996 or even 1992 when, again, confidence was at its lowest. However, it is difficult to make optimistic forecasts for the profitability of companies in 2002, as no one can predict when the international recession will end. Also, the rise in the total liabilities of companies can only cause concern, particularly if interest rates rise at some point in the future. Second, the functional deficiencies of the stock market remain serious; the numbers of listed companies (and those waiting in line) and of their intermediaries remain large, while the quality of dissemination of information remains low. Modern corporate governance is not the rule, while few companies meet the qualitative requirements for attracting foreign funds. Institutional investors are unable to fulfill their role, pension funds remain non-existent and it remains difficult to find investors willing to enter the market for the long haul by buying shares with satisfactory fundamentals. The result is that the lobbies frequently set the daily tune in the stock market, as the widespread impression remains that the bourse is a game of short-term movements based on speculation and underground rumors. New public utilities are now listed, the primary aim being the collection of revenues to meet budget targets. The result is that the balance between the supply of stocks and market liquidity continuously worsens, creating conditions for stock prices to fall further. The final question is, can we remain optimistic? I believe that despite the unfavorable global circumstances, which should be overcome within the next year, the particularities of the Greek market are not negligible. These include the expected high rate of growth, the prominent role of the country in the Balkans, and the positive expectations which the Olympic Games of 2004 are expected to foster. The downturn started more than two years ago, and prices occasionally touched ridiculously low levels, as on September 21, when the ASE general index briefly fell below the 2,000 point mark. Only new and dramatic events could hasten a return to such low levels, and this does not seem particularly likely. The functional ills of the stock market are gradually being smoothed out, which will help boost confidence. It is necessary, however, that this procedure is conducted with consistency and continuity by all parties involved. The ASE should seek out strategic alliances with other bourses so as to minimize the potential outflow of funds abroad. The realization is growing daily that the improvement in the competitiveness of the Greek economy is intertwined with progress on structural changes. There is also a satisfactory degree of concentration of most stocks in the hands of basic shareholders and institutionals. We are thus entitled to a certain degree of optimism, based on the consideration that despite the likely continued stagnation globally, the Greek economy has the potential to stand out and diffuse beneficial effects to the stock market. Investing in companies with strong fundamentals, therefore, is very likely to yield satisfactory medium- to long-term returns.Dimitris Tzanas is investment director at Omega Investment Services Company.

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