ECONOMY

More active investors?

The protracted slump of the Athens stock market during the 2000-2002 period hurt the Greek equity culture, but this did not stop Greek blue chips from staging a rally in the ensuing couple of years, thanks to heavy buying by foreign investors who took up the slack. However, the increased equity stakes of foreign investors in key local listed companies has not had any implications for top management and corporate behavior, as happened recently in Germany due to restrictive legislation. Although this shareholder activism may not be a panacea, it ought to be encouraged by the Greek authorities by removing the hurdles to their participation in the general shareholder meetings. There is no doubt that local retail investors’ confidence in local equities was shaken by the bursting of the stock market bubble from 2000 onward. The fact that most of them had invested in small and-medium-sized companies may have made things worse, since they did not join in the 2003-2004 rally like elsewhere in Europe. On the contrary, the vast majority of small-caps suffered considerably even during the recovery years, as local closed-end and open-end funds as well as financial institutions unloaded their shares. The solid performance of blue chips during the 2003-2004 period did not really touch them, as continuous redemptions of mutual fund shares and the decrease of active brokerage accounts show. Therefore, it is not surprising that outflows from domestic equity mutual funds surpassed 420 million euros last year and continued this year, reaching 233 million in the first four months of 2005. Some analysts do not even rule out the possibility that this year’s net outflows may exceed last year’s figure, regardless of the bourse’s performance till year-end. Domestic balanced mutual funds, which may invest a good deal of their assets in local equities, also experienced outflows even adjusting for a change in mutual fund classification. On the other hand, foreign investors continue to pour money into a select batch of 20-30 Greek companies. Being the prime force behind the 2003-2004 rally, foreign investors continue to build positions on the Athens bourse with purchases exceeding sales of Greek stocks by some 870 million euros from the start of the year till the end of April. According to official figures, foreign investors brought in a net of 60.32 million euros last month. As a consequence, they control more than 42 percent of the market cap in the country’s 20 largest listed firms and more than 35 percent of the bourse’s total market capitalization. Sensing the trend, analysts and brokers predict foreign investors’ control over the Greek shareholder base is bound to increase in the months ahead, even if local investors stop being net sellers of Greeks stocks. They point to the part-flotation of state lottery OPAP, valued at more than 1 billion euros, which is expected to take place in early July as well as some other much smaller placements by the major shareholders of Greek mid-caps. This does not ignore the fact that analysts, brokers and fund managers working for foreign entities appear more sceptical now than they were earlier in the year about Greek equities, although they remain positive overall. The increased participation of foreign investors in the shareholder base of Greek corporations and daily trading on the Athens Stock Exchange has not been matched by a willingness to influence the behavior of Greek corporates. Some claim that a major hurdle toward a more activist approach has been restrictive regulations. The most prominent among them is the requirement that investors keep their shares for some five working days before they are allowed to participate and vote in shareholder meetings. National Bank Chairman Takis Arapoglou was the first to raise this issue, but his recommendation that this particular requirement be changed has not been adopted yet, as far as we know. The issue came up recently when non-German investors succeeded in displacing the CEO of listed Deutsche Boerse (DB), just six months after he made known DB’s bid for the London Stock Exchange (LSE). The 2.0 billion euro cash bid for LSE was replaced by a 1.5 billion capita return, boosting the company’s shares. This event in Germany should not be looked upon with indifference. German retail investors appear to have shunned the equity market in the last few years while banks and insurance companies have liquidated shares, bought mainly by foreign investors who have taken up the slack In this environment; the unwinding of cross-shareholding by German companies helped increase foreign investors’ equity stakes even more. At this point, foreigners are estimated to control more than 50 percent of the free float of Germany’s 30 biggest companies, and the their stake is likelier going up than down. It should be noted that by pursuing a more activist approach, foreign investors do not always bring about the best corporate outcome in the long run. After all, capital is supposed to be used to make investments and keep the business growing, not be used to shrink equity by returning capital to shareholders. Indeed, cutting back on capital expenditures and returning more capital to shareholders may not be the best strategy all the time, especially if there are investment opportunities promising higher returns than the alternatives. This does not mean, though, that all shareholders, including foreigners, should not have a greater say in the way the company is run, including putting pressure on management to change things. This is the more so in Greece, where domestic institutional investors have failed systematically to exercise their right as shareholders and criticize corporate actions or even seek the overthrow of incompetent management teams, hurting the wealth of their own shareholders. In this respect, the Greek government ought to encourage greater participation of foreign investors in the general shareholders’ meetings by removing all remaining obstacles. More investor-friendly corporate behavior should be viewed positively, even if it is pursued by activist foreign shareholders.