Market needs breadth

The Athens Stock Exchange was a top performer among the developed markets over the last couple of years and has performed relatively well so far this year. However, this has done little to stop the steady outflows from equity mutual funds investing in the local market or domestic financial institutions from absorbing closed-end funds, another component of the local institutional base. So far, non-resident funds of various types have more than taken up the slack, increasing their equity stakes in 10 to 30 listed companies, but everybody should know this cannot go on forever. So, the question is whether there will be a future for the Athens bourse two or three years down the road if, as it seems, local retail investors continue to shun the market. Thanks to foreign inflows into Greek stocks, mainly in large-caps as well as a handful of medium-caps, the MSCI-Greece national stock index, compiled by Morgan Stanley Capital International (MSCI), returned 31.06 percent last year, ranking third among all developed markets. Austria came first with a 57 percent return and Norway third with 36.2 percent. It was the second consecutive year of exceptional returns. The MSCI-Greece stock index offered the second best return among all developed bourses in 2003 with a gain of 35.79 percent. Norway ranked first with 38.13 percent and Germany third with a 33.23 percent return in 2003. Greece has done fairly well so far this year as well, since the national MSCI stock index has gained 2.55 percent year-to-date versus a gain of 0.26 percent for the broader MSCI-Europe index and a loss of 0.28 percent for the MSCI-Euro index. Despite this impressive outperformance, interest in Greek stocks by retail investors has not revived. Understanding the importance of building investor confidence in a market regarded in the past by many people as an «insiders’ market,» the local authorities have taken measures toward that end. Although these confidence-building measures usually take a long time to work, it is doubtful whether they will have any significant impact on the way the average Greek citizen looks at the stock market after experiencing huge losses after the stock market bubble burst a few years ago. Perhaps the most important reason for that has been the fact that the vast majority of Greeks who discovered the Athens bourse during the 1998-1999 heyday years put their money into overvalued small-caps to make a quick profit. This was, of course, more speculation than anything else but left deep scars. These wounds were not healed in subsequent years, as some of the main investment vehicles that had played an important role in propelling these stocks to stratospheric highs abandoned them. This happened either because they saw the trend and turned to large-caps at the expense of small and medium-caps or because they were forced to do so due to large-scale redemptions of units by mutual fund holders. But domestic equity mutual funds and balanced mutual funds were not the only ones liquidating positions in medium- and small-caps. By all counts, large and small banks significantly reduced their own stock portfolios, raising cash that was put to other uses. In addition, banks sought to take advantage of a law intended to provide incentives for M&A deals, such as significant tax benefits, and absorbed their closed-end funds. Alpha Bank absorbed Alpha Invest Fund; EFG Eurobank absorbed the Development Fund and the Ergo Invest Fund and is widely expected to do the same with Proodos, one of Greece’s best performing closed-end funds. Other banks also absorbed their subsidiaries, such Piraeus Invest, Aspis Invest and Marfin Classic, while National Bank is widely expected to absorb National Invest and Piraeus Bank to do the same with Hellenic Investment Fund. By doing so, the banks ended up with a good deal of stocks which they liquidated. The combination of outflows from domestic stocks and balanced mutual funds, the liquidation of shares in bank portfolios and the absorption of closed-end funds on an unprecedented scale for European and world standards has deprived the Athens bourse of a potential source of demand for Greek stocks, measured in hundreds of millions of euros. Moreover, this lack of demand has deprived local retail investors – more eager to join in momentum plays rather than value investments – of the key momentum driver. This has alienated them even more from the Athens bourse because the few times they joined momentum plays, it turned out they were just traps. Given this background, it is easy to understand why even the MSCI-Greece small-cap index, comprising medium-caps, has strongly underperformed its peers in the developed market camp in the last few years – even in 2003 and 2004 when the MSCI-Greece index performed superbly. One must remember that European small-caps have fared much better than large-caps in the same period, something that may explain the greater willingness of other European investors, always known for their more conservative style compared to their American counterparts, to invest in equities. Of course, non-resident funds may continue to invest in selective Greek stocks, driving the main stock indices to new highs in the process. And perhaps some average Greeks may finally decide to stop parking all their money in low-yielding bonds or low-interest-rate money instruments and put a portion in risky assets, including stocks. However, this is unlikely to happen in the foreseeable future and, even if it happens, it may take the form of channeling money into foreign equities. It is true that forecasting the future has never been an easy exercise, especially when it concerns volatile stock markets. There are reasons though to believe that the average Greek retail investor will not return to the local stock market en masse in the foreseeable future. This, coupled with the rational assumption that some of today’s stars – namely banks, accounting for the increasing presence of non-resident shareholders – may not shine as brightly as today in a couple of years, it makes one wonder about the future of the Athens bourse. Of course, new company stars may be found. However, it is hard to believe they will have the weight of banking stocks to lift the bourse to new highs and lure back the disappointed local retail investor.