Investors ignore rumors

Stories of corruption supposedly involving government officials and doubts about the government’s ability to invigorate the economy and create jobs while keeping the budget deficit below 3.0 percent of GDP may dominate local news but have done little to shake foreign institutional investors in the Greek growth story. Although headwinds in international equity and debt markets in the last few weeks have been rather strong and local retail investors continue to shun the Athens Stock Exchange, the signals from foreign funds continue to be rather encouraging for the government’s privatization program and an expanding list of selective Greek companies. The significance of the above assessment shared by a good deal of local brokers, analysts and bankers should not be underestimated, given the dependence of the Greek stock market and to a lesser degree of public finances and the economy on the flows of foreign institutional and private portfolios. After all, more than 45 percent of the capitalization of Greece’s 20 largest listed companies is in foreign hands. The percentage of government bonds that are parked outside the country is even better demonstrated by the fact that 15 of Greece’s 20 primary dealers are foreign banks. A similar pattern in the attitude of foreign and Greek investors was observed at this period last year. Many Greek retail investors were taking advantage of the pick-up in stock prices to sell their holdings, while local fund managers were busy trying to figure out how to cope with redemptions by holders of domestic equity fund shares. Although high expectations for structural economic reforms linked to New Democracy’s return to power had not been fulfilled for various reasons and the auditing of fiscal accounts revealed a much bigger budget deficit than most economists had dared think, foreign funds stayed put and even increased exposure on the local stock market. It was a wise choice, judging from the results. The Athens bourse ended up being one of the three top performers in the developed markets league in 2004 and has produced a respectable double-digit return from the start of 2005 through last Friday. By gaining 16.5 percent year-to-October 28, according to the MSCI Greece Index, the local stock market ranked 6th among 23 developed stock markets worldwide, following Austria, Denmark, Japan, Norway and Switzerland. But these respectable gains, along with its high ranking among its peers for the third consecutive year, would not have been possible without outside support. Given the hesitation by local retail investors to join in and the increasingly large holdings of foreign investors, it is certain that the Greek stock market and the government’s ability to collect more than 1.6 billion euros from privatization deals next year depend on their plans for Greek stocks next year.  The fact that most people who have talked to any number of foreign portfolio managers have left with the same positive impression about their intentions is a first good sign. It is also important for another reason. Most fund managers have done well so far this year and this is the reason they are inclined to close their books now, meaning they are choosing to lock in profits to ensure they collect their bonuses, usually in the first quarter of 2006. This means they are holding a lot of cash and have hedged a good deal of their equity portfolio to avoid the ups and downs of the market from now til the start of the new fiscal year. But the unofficial end of a good year heralds the search for a strategy and the stock-winners of next year. This is exactly what is happening right now and Greece appears to show up again in their radars. From all accounts, it appears that large Greek banks continue to attract their attention because they still offer double-digit earnings growth and visibility for the next two years despite an expected slowdown in loan volume growth. In their eyes, the National Bank of Greece and EFG Eurobank add a Balkan flavor to their growth story, followed by Alpha Bank and Piraeus, while Emporiki Bank could be a turnaround story as part of a larger banking institution such as France’s Credit Agricole. The seeming success of OTE’s large voluntary retirement program has pleased foreign funds and improved its image, making it easier to lure new investors. The prospect of a merger with its mobile subsidiary CosmOTE and a potential strategic alliance with a large foreign telecommunications operator over the next couple of years have not escaped their attention. Moreover, the success of OTE’s voluntary retirement program has convinced some that more is in the offing for other listed state-controlled entities, such as Hellenic Petroleum and the Public Power Corporation (PPC). However, some appear to be hesitant about PPC, according to all accounts, before it sorts out its management problems at the top. Lottery operator OPAP is high on their list but some appear to feel they have been misinformed about the introduction of Greek soccer games in Stoichima during the placement of millions of shares of the operator by the state over the summer. In addition to these heavyweights and others, such as Coca-Cola Hellenic Bottling, a series of mid-caps appear to have made their presence felt in the circles of foreign fund managers. Technical Olympic, which extracts a good deal of its revenues from the US real estate market, is one of them. Titan Cement, which earns nearly half of its sales and earnings in the US market appears to be another one, while the likes of Folli-Follie, Germanos, Sarantis, Jumbo, Hyatt, Mytilineos, Delta Holdings, Chipita and Maillis also appear on their radar screens. With plenty of cash available, fund managers and their research analysts have been combing the Greek market in search of new growth stories. These include mid-caps, such as banks, which have never made it onto their radar screens before. This explains why they have set up appointments with high-level company officials in the next 40 days or so before foreign funds, including hedge funds, form their strategy and pick next year’s winners. The continued interest by foreign portfolios for an expanding number of Greek stocks is more indicative of their confidence in the ability of the firms to deliver superior earnings growth in the future and restructure their operations. This explains why domestically popular stories of corruption and doubts about the degree of fiscal consolidation have failed to grasp their attention so far. This development should please the government because it looks as if its precious foreign allies will be there next year to help it fill the state coffers with a lot of cash from the planned privatizations.