This time, it is foreigners who are sustaining the bull market
It happened before and it is happening again. Most Greeks, including government officials, are watching in disbelief as the Athens Stock Exchange rallies, fueled by heavy capital inflows from all kinds of non-resident funds and other entities who obviously can see something that most locals are missing. As is usually the case, the sharp and unexpected rise of the Athens bourse has prompted all kinds of statements for caution by pundits and officials who readily remind local individual investors of the painful experience of the bourse’s 1999-2000 skyrocket rise and fall. But it is not the locals who have propelled the market to fresh multi-year highs. It is mainly foreign investors. So, it is reasonable to ask who is right and who is wrong and why. On a 12-month horizon and barring a large international shock, we think foreign investors and speculators will turn out to be right again. The Athens General Stock Index crossed the 4,000 point mark on Friday, visiting levels it has not seen since the autumn of 2000, undeterred by sliding developed markets in Europe and on Wall Street later in the day on the back of the rising price of oil, which exceeded the 68 dollar barrier, as well as disappointing fourth quarter financial results by US giants GE and Citigroup. It is this kind of performance that has made the local bourse the darling of foreign investors and speculators and put it on the radar of even more foreign funds from the passive ones trying to duplicate the return of MSCI indices to active ones, ranging from mutual funds, pension funds, hedge funds and others. The MSCI-Greece stock index ranked first in the league of developed markets worldwide year-to-Friday, January 20, with a return of 8.7 percent in euros, followed by Norway with 5.2 percent and the usual suspect, that is, Austria, with 4.6 percent. Undoubtedly, the sharp rise of the Athens Stock Exchange in such a short period of time warrants caution but this is only because it is susceptible to heavy duty profit-taking which may increase volatility and pave the way for a period of consolidation. After all, the bourse cannot go straight up all the time even in a bull market. But, real money accounts or/and speculators who have taken locals by surprise do not obviously read the headlines in much of the local press. They look at other factors most Greek officials and retail investors have not fully appreciated. Discounting earnings Although the valuations of many Greek companies are demanding after the sharp rise of their shares, foreign funds, full of liquidity, feel more confident to discount their future earnings well into 2007 from the start of 2006. This was not the case even a year ago. Foreign funds wanted first to see proof that Greek companies in their focus would deliver the kind of earnings per share they had promised before buying into them or increasing their stakes. This practically meant they would wait till the first-quarter financial results were out and sometimes even the second quarter’s before feeling confident in making their move. After a long streak of meeting or beating consensus earnings estimates, the large Greek companies, especially banks, won their confidence, making these funds more eager to adopt their rosy profit projections earlier on. This has generated an inflow of capital, usually dispersed over a longer period in previous years, giving an impetus to the Greek market. Of course, mainstream funds are not alone. They are joined by others, such as hedge funds or more specialized funds seeking exposure to the presumably high growth areas of Central and Eastern Europe via Greek companies with growing franchises in these countries and selective large-caps with potentially restructuring stories, such as OTE telecoms and PPC. High net worth Greek individuals, who have been in and out of the Greek stock market for sometime, have also joined in, sometimes attracted by buyout stories, such as the local Hyatt Regency and Info-Quest earlier on, and increased corporate activity in other mid-caps. Bullish projections What else do they see? They assume that the international economic environment will be benign and the high price of oil will not bring world economic growth to a standstill. The majority sees an end to the Fed’s campaign to hike US interest rates – a bullish sign for emerging markets where Greek companies are active – and they think that the ECB will not hike as aggressively this year and next, meaning it will take steps to normalize its intervention rate but will still keep it accommodative, that is, below 3.5-4.0 percent. As far as Greece is concerned, they were fast to grasp that reforms are finally being implemented in the labor market and in other areas, increasing the chances of self-sustained growth in the years ahead. This, along with Greece’s securing some additional 20 billion euros in EU aid during the 2007-2013 period, has made them more comfortable with forecasts for strong economic growth for years to come which bodes well with expectations for double-digit revenues and earnings growth by listed companies in the next two to three years. Progress in reducing the budget deficit is also seen as a plus but they would rather see a smaller deficit even if it meant ending up above 3.0 percent of GDP at end-2006 rather than having it dip below the EU threshold due to restrictive fiscal measures, undermining GDP growth and corporate sales growth. It is understood that this is a rather bullish assessment of Greece’s macroeconomic and microeconomic environment and may turn out to be wrong. After all, past experience is not always repeated in the future. But, even if one takes into account thorny problems, such as the country’s high public debt and ailing social security system, it is difficult to disagree with them. Even more so to go against the trend even if one realizes that company valuations are indeed rich and increased market volatility blended with breathtaking price swings and relatively sharp corrections may be in the cards in the weeks ahead.
