Greek stocks waiting for foreign markets’ recovery
If somebody had asked a Greek or a foreign analyst a couple of years ago to pinpoint the main advantage of the Athens Stock Exchange going forward, he or she would most likely have referred to the projected high growth rates of the Greek economy. Two years or so later, this linkage does not seem to work. The Greek economy has been growing at lower rates than forecast but which are still satisfactory, yet the Athens bourse continues to disappoint, featuring the second worst performance among developed markets so far this year. Could a sustained economic recovery in the US and the rest of the eurozone breathe life into the local bourse? Perhaps yes, but it won’t come from corporate profits. Indeed, the MSCI-Greece stock index lost 19.06 percent in dollar terms from the beginning of the year to April 12, emerging as the second worst performer behind MSCI-Finland’s 20.33 percent New Year-to-April 12 loss. MSCI-Ireland was the third-worst performer among developed markets, shedding 19 percent. At the same time, the MSCI-Italy stock index was up 0.95 percent, the MSCI-Portugal index was down 5.32 percent, MSCI-Germany was down 1.58 percent, and MSCI-France down 4.52 percent. The MSCI national index for the UK was down 2.53 percent in dollar terms over the same period. Signs of a strong economic recovery in the US and to a lesser extent in the eurozone in the first quarter of 2002 have done little to inspire the local stock market, as speculation about negative earning surprises on top of the 2001 corporate earnings disappointments have hurt investor sentiment and reduce earnings visibility, rendering comparative valuations with other European companies less attractive and relevant. In addition to all these bad omens, the Athens bourse seems to be getting little support from its supposedly strongest point, the Greek macroeconomy. Although Greek GDP grew by 4.1 percent in 2001, the same as in 2000, and is widely projected to grow by 3-4 percent this year, more and more analysts caution against optimistic conclusions. They believe these growth rates are mainly supported by EU funding, and cite lack of progress in the privatization program and structural reforms to suggest the lack of a strong internal growth motor to keep the economy going in the long run. It seems they have been particularly alarmed by the government’s latest proposals to reform the country’s ailing social security system, because they believe the latest proposals do not deal with the fundamental problem of rising public pension expenditure, but simply aim at funding the deficit and minimizing political risk. Some even suggest that Greece is running the risk of a credit downgrade by an international credit agency next year if things are left on their own and the political landscape gets muddier. The fact that consumer price inflation remains stubbornly high, with the national CPI rising 4 percent year-on-year in March from 3.4 percent in February and the harmonized figure picking up to 4.4 percent versus 3.8 percent in February, has done little to improve the picture. Instead, it has highlighted the insufficient progress made toward the liberalization of the electricity and fixed telephony markets. Moreover, the international competitiveness of the Greek economy continues to be undermined by the growing inflation differential between Greece and many other eurozone countries. So even though disappointing corporate earnings have been the main cause for the Athens bourse’s retreat so far this year, a less rosy macroeconomic picture coupled with more political friction seem to have taken their toll on the bourse as well. If this is the case, then the only way out is a sustained pickup in the US economy and some of the large eurozone economies, translating into a recovery of corporate earnings abroad. The rise of foreign markets would have helped widen the valuation gap between Greek and other EU companies and at the same time improved the appetite of foreign funds for riskier securities such as Greek stocks. Even a sustained economic recovery abroad, however, would have done little to improve the earnings profile of most local listed companies. With the exception of a few Greek companies exporting a good deal of their production abroad and some others having subsidiaries in the recovering foreign economies, the others would have benefited marginally at best. The main reason for that happening has to do with their investment choices in the last few years, when most chose to use the IPO and share capital proceeds to retire debt and/or acquire equity stakes in other listed and non-listed companies, some belonging to the so-called new economy. It is difficult to say whether this choice was dictated by misguided ambition or other considerations, such as sufficient capacity to meet local demand. Nevertheless, it is clear that these past choices now prevent them from taking advantage of a likely pickup in foreign demand. Contrary to what was expected a couple of years ago, the relatively high growth rates of the Greek economy have done little to help the Athens bourse. This is to some extent justified by concerns about high inflation and the sustainability of high GDP growth rates in the future, given insufficient progress in economic reforms. A global economic recovery should have a positive impact on the bourse. However, this will have more to do with foreign portfolio inflows and much less with rising corporate earnings benefiting from global cyclical growth. The prime minister said that the government is not bound by your commission’s proposals. Does that bother you?
