Early elections may prove double-edged sword for ASE

If the pundits are right, 2007 will be the fifth consecutive year of gains for the Athens Stock Exchange and most other developed bourses worldwide. The first week of trading has already left a sweet taste in the mouth of investors as Greek stocks registered sizeable gains, outperforming their peers in the developed stock markets worldwide. However, Greek stocks will most likely face an additional hurdle this year. Early general elections. Can they live up to the consensus expectations? The Athens Stock Exchange (ASE) surprised even the optimists in the first week of trading into the new year as the benchmark General Stock Index gained more than 4 percent to top the 4,500-point mark last week, beating the pan-European DJ Stoxx 600 index of the 600 largest European companies which added just 0.1 percent. The situation looks even better when one compares the performance of the Athens bourse to the other developed markets, using the MSCI-Barra stock indices. The latter are used by many institutional portfolios worldwide as a benchmark to judge their own performance. The MSCI-Greece index gained 4.67 percent in the first week of 2007. Of course, one week of trading is not enough time to tell about the whole year. However, it leaves a good taste after an average performance in 2006. It is noted that the ASE gained 17.7 percent last year based on MSCI data to occupy the 14th place in the rankings, but had done better in 2005 when it came in seventh with a return of 29.8 percent. In 2004, the year of the Olympic Games, MSCI-Greece ended up in the third place with 31.06 percent in the local currency, and in 2003, the first year of the current rally, the ASE was second, returning 35.79 percent. It is no secret that the Athens bourse would not have gone that far if it relied on local investors. The official figures put out by the Athens Stock Exchange confirm that retail investors are net sellers of Greek equities alongside local institutional portfolios, such as mutual funds which face redemptions by their shareholders and closed-end funds which have been absorbed by their parent companies for tax benefits, liquidity and capital gains. Of course, all these kinds of foreign funds would not have come to town if they did not buy the stories of some listed companies, underpinned by the strong growth fundamentals of the Greek economy. The funds were attracted by the low valuations and the growth profile of Greek retail banking in 2003, in addition to other large-cap and medium-cap companies and the restructuring stories of state-controlled companies such as OPAP and Postal Savings Bank. But the valuations of the Greek companies on the radar screens of foreign funds have become demanding, meaning their stocks are bought at a premium compared to many of their other European peers from the same sector. To this extent, convincing foreign investors, old and new, of their strong earnings growth profile in the years to come amid a favorable macroeconomic environment is essential to keeping the Athens bourse on an upward trajectory. But, aside from some industrial companies and leaders in some sectors such as the OPAP lottery, the ASE is dominated by banks and telecoms, both trading at a premium to their European counterparts for different reasons. Banks’ growth story intact As far as banks are concerned, their 2006-2008 growth story remains intact for the time being and it just has to be updated when the new business plans are presented. But as far as OTE, the telecom incumbent, is concerned, the premium appears to relate more to M&A than its own growth story in a liberalized telephone market. If, for whatever reason, the government does not find a large European telecoms operator to become OTE’s strategic partner, the premium built in OTE shares may be reduced. This should put a lid on the stock price of the heavyweight company and may require an impressive outperformance by the European telecoms sector to keep it from correcting sharply. The likelihood of general elections later in 2007 will likely affect the process for finding a strategic partner for OTE and perhaps derail it for a while as the government may choose to proceed with the private placement of some 8 to 10 percent of OTE shares it holds for the moment and keep its options open. The prospect of early general elections will not affect the Athens bourse only through the OTE channel. If it is perceived by foreign investors to lead to a halt of all economic reforms for a protracted period of time, it may affect a broader array of listed companies, state-controlled and private, and therefore the Athens bourse. Is this likely? We would not think so since the government is likely to shorten the pre-election period to the minimum required under law. However, elections are elections and there is always an element of uncertainty built in despite the fact that most polls show the ruling conservatives to lead by some 2.0 percentage points over the main socialist PASOK opposition party and most political analysts expect it to win. This is especially true given the electoral law governing the next elections. In this regard, early elections – whether they are held in May-June or in the fall instead of the spring 2008 as scheduled – represent a hurdle for Greek equities once it becomes clear they are unavoidable. However, this hurdle may turn out to be either a catalyst for outperformance if there is a clear winner since the road to wider reforms will be open or a catalyst for underperformance vis-a-vis the other developed European stock markets if elections do not produce a strong government. In this regard, the ASE has an extra incentive either to excel in 2007 or fare much worse than the 14th place it got in the developed equity market rankings in 2006. Other than this and turmoil in international financial markets, the skies are blue with just a few clouds producing short periods of rain here and there in the new year.

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