ASE out of the woods?

At the end of 2004, the Greek economy was haunted by huge fiscal imbalances and concerns about a significant slowdown after the 2004 Olympics. Few local experts expected the Athens Stock Exchange (ASE) to repeat its stellar performance of the last two years again in 2005. Well, seven months into the year, the local bourse continues to defy most local experts by delivering one of the highest returns in its league. Assuming the stock markets discount the future, one may be tempted to interpret the Athens bourse’s strong performance as a good omen for the Greek economy at a time most press reports, businessmen, small shopkeepers, consumers and others complain about the state of the economy. Is this the case? Although the stock market is just one of a few leading economic indicators, we would agree with the assumption, provided the advance of the bourse was broader and was not limited to 20-30 stocks tracked mostly by foreign funds. We believe it is an encouraging sign of economic times ahead but should not be overstated because other signs point in the other direction. Still, at this stage the optimism exhumed by the bourse wins over.   Adverse factors There is no doubt that economic growth is a significant determinant of corporate earnings growth and, therefore, of the bourse’s course, and is partly contingent on progress in fiscal consolidation. But fiscal consolidation is not one of Greece’s strongest points. Let’s not forget that the 2004 budget deficit surpassed the 6.0 percent of gross domestic product (GDP) mark, prompting the EU to give Greece two years to bring it below the 3.0 percent threshold. Moreover, the sense that things were getting out of hand prompted the government to hike value-added tax (VAT) and some excise taxes in the spring to help reverse an alarming trend in revenues. These restrictive measures may have boosted budget revenues somewhat but not to the extent envisaged. Budget deficit figures for the first half released by the government last week show a noticeable improvement of 11 percent in the deficit gap. However, this is not sufficient to rule out the possibility of more restrictive fiscal measures in the fall, generally regarded as negative for economic growth and the bourse. Of course, the government can count on proceeds from the securitization of delinquent taxes to help reduce this year’s budget deficit to about 3.9 percent of GDP, but these proceeds are not repetitive. Structural reforms In this regard, one may say market participants either have opted to ignore the course of public finances or taken a more optimistic view of fiscal developments in the future. It may be more likely though that they place less weight on the fiscal factor when it comes to forecasting corporate earnings than anything else. By talking to market participants working for well-known international investment houses, one gets the idea that they put more weight on other factors at this stage, noticeably the government’s drive for structural reforms in the labor market, the liberalization of other markets and the effort to resolve the bank pension issue in view of the application of International Financial Reporting Standards (IFRS). The successful flotation of the state-controlled OPAP lottery last month and the prospect of more placements has also kept alive the interest of foreign investment companies for Greek heavyweight stocks and the Athens bourse in general. «The pursuit of structural reforms by the government underpins the Greek investment story,» says Dimitris Spanodimos, bank analyst at UBS in London. In addition, the smooth transition to IFRS accounts also helped soothe investor fears of adverse effects on corporate earnings growth forecasts even though first-quarter financial statements were not audited following permission by the authorities. Moreover, analysts pointed out that a number of heavyweight firms, such as banks, took advantage of the introduction of IFRS to adjust downward last year’s earnings to show a greater improvement in 2005. This prompted local brokers, such as EFG Eurobank Securities, to up its earnings per share (EPS) forecast to 24 percent from 21.4 percent previously for the Greek stocks on its watch list, accounting for more than 80 percent of the total market cap of the Greek stock market. All of these factors have combined to make the Athens Stock Exchange a top performer in the developed markets league again this year, despite the ongoing outflows from domestic equity funds. The MSCI-Greece stock index, which is followed closely by foreign institutional investors, gained 6.4 percent in July to land in first place among developed stock markets, with Germany in second place. This put Greece in third place on the basis of year-to-July performance, with 17.6 percent, behind Norway and Austria, which lead the pack with 24.1 percent and 23.5 percent respectively. However, the Athens bourse’s out-performance has been made possible by the continuous net buying of some 30 Greek stocks from abroad. In this regard, it is more a by-product of the confidence of foreign investors in the prospects of these companies and the Greek economy and much less a vote of confidence by Greek investors. On the contrary, the latter continue to desert the bourse. Following net outflows in excess of 400 million euros last year, a strong year for the Athens bourse, net outflows from equity mutual funds investing in Greek shares have surpassed the 300-million-euro mark so far this year. Whether it is due to the bourse’s lack of credibility in the eyes of local retail investors or to the need to finance other purchases, this behavior bodes well with the pessimism about the economic situation coming out of local press reports and statements by businessmen, employees and others. In so doing, these investors have lost out on the stock market rally of the last two-and-a-half years, making them even more fearful to enter it at current levels. We must note that the MSCI-Greece index ranked third among all developed markets in 2004, returning 31.06 percent. Austria ranked first with 57 percent and Norway second with 36.2 percent. So, is the strong performance of the Athens bourse again so far this year a leading indicator of good times ahead? The answer is obviously «yes» according to foreign market participants but «no» according to local retail investors. Time will tell who is right and who is wrong. But at this stage we would bet more on the «yes» and less on the «no.»

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