Favorable omens for ASE if foreigners stay the course

If the pundits are right, the Athens Stock Exchange could rise to levels last seen in the second half of 1999, the year remembered both for setting a historic record and making hordes of Greek retail investors turn their backs on equities. The Athens Stock Exchange general index, the most popular benchmark index among Greeks, gained 1.08 percent to close at 4260,72 points on Friday, getting closer to its year-high of 4,366 points. Buoyant third-quarter financial results by heavyweights Eurobank EFG, Piraeus Bank, CosmOTE and Titan Cement, along with optimistic guidance for their future earnings during the ensuing teleconferences and rising stocks elsewhere on the continent have underpinned the recent rally. The favorable international environment is a necessary condition for Greek equities to perform well. After all, the rise of the benchmark stock index to current levels from 1,700 points in early 2003 would have been impossible without the massive net inflows from investors living in foreign countries. This trend continues this year. All kinds of foreign investors, including the offshore companies of Greek companies and individuals, have bought local stocks worth more than 3.7 billion euros in the first 10 months of the year, compared to outflows of 3.18 billion euros from domestic investors and private sector financial institutions during the same period. The public sector has also been a seller, liquidating stocks worth 1.33 billion euros during the January-October period. On the positive side, non-financial private sector companies have bought a total of 876 million euros during the same time span. Some of the latter are listed companies engaging in share buyback programs because they obviously believe they are worth more than the market has priced them now. But foreign investors, like all investors, tend to increase their equity positions in small, growth markets like Greece for two main reasons: First, they feel confident the target companies offer good earnings visibility and have the ability to consistently deliver good or better than their expected profits. Second, the general international economic and financial environment is benign. Of course, there are other considerations such as liquidity, the prospect of merger and acquisition (M&A) activity, transaction costs and the existence of a derivatives market, among others. Nevertheless, corporate earnings and the international economic and financial market outlook dominate. It is not difficult to see why this is the case if one recalls the negative implications of the sharp stock market correction during the May-June period on the Athens bourse. The prospects of 2 percent or better economic growth next year in the eurozone and the expectations of high single-digit or double-digit growth in European corporate profits along with increased M&A activity have all played a role in improving investor psychology at a time when cash is still abundant despite a string of European Central Bank rate hikes bringing its base euro rate to 3.25 percent from 2.0 percent a year ago. The optimistic market scenario is reinforced by Bloomberg data showing that 33 of the 50 large European companies belonging to the DJ Stoxx 50 index have beaten analysts’ consensus third-quarter earnings estimates. Fast growth There is not yet such a large sample for the Greek heavyweights, although the first results look promising. Still, fund managers abroad do not miss the fact that the Greek economy continues to grow faster than the vast majority of its eurozone peers. The local economy is expected to grow by about 4 percent in the next couple of years and this translates into nominal GDP (gross domestic product) growth of more than 6.0 percent, a good yardstick for the sales of companies in sectors which tend to follow the ups and downs of the economic cycle. This is the first thing fund managers point to when someone asks the classic question: «Why Greece or Greek companies?» The prospect of superior earnings growth is supplemented by the stability and lower risk offered by investing in listed companies in a eurozone country, offering some exposure, sometimes significant, to neighboring underdeveloped countries. In a good international environment, this combination leads both to higher corporate earnings and hefty capital gains as demonstrated by the Greek experience of the last few years. The general stock index almost tracked the gains of earnings per share (EPS) of 55 large companies which are on the focus list of EFG Securities in 2005. The earnings per share of these companies, accounting for about 85 percent of the total market capitalization of the Athens bourse, rose about 30 percent in 2005 and are seen as rising by some 21.5 percent this year. The benchmark index, which kept in line with EPS growth in 2005, has lagged behind so far this year. It has gained about 15 percent, so it needs to advance another 6.0 percent or so by year-end to reach 4,500 points and perform a repeat. There is good reason to believe – based on guidance provided by the management of heavyweight banks, large industrial companies and telecoms operators and analysts estimates – that the EPS growth of these 55 companies could reach 15 percent next year and proceed further with double-digit growth in 2008. Under these circumstances and assuming the general rule of thumb linking general stock index gains to EPS growth is maintained and expectations about benign international markets conditions are not upset, it would not be surprising to see the benchmark index around or above the 5,000-point mark. It would be a pity though, if things indeed turned this way, as the majority of Greek retail investors who dipped their toes into the Athens bourse in 1999 will not be there to cheer. At least the rest of Greek smart money and foreign investors will most likely be there.

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