Stock market correction may prove an unlikely election bonus for gov’t

Sophocleous, the street name by which the Athens Exchange (ATHEX) is known locally, is not lucky. When merger and acquisitions (M&A) activity finally seemed to be picking up, boosting its returns, turbulence on international credit markets, spilling over into equities, put the brakes on its advance. The question is what is next as the country seems to be heading toward early elections in September. In the first six months of the year, the Athens bourse managed to keep up with the other developed stock markets, despite its superior earnings-per-share outlook. The gains of 9 to 10 percent were satisfactory but not excellent, although most Greek blue chips had met or surpassed consensus profit estimates in the first quarter and were on their way to doing the same in the second quarter of 2007. The lack of sufficient M&A deals accounted for that, as we pointed out in late June. The successful completion of the big -5.2 billion share capital increase by Marfin Investment Group (MIG), a private equity group, created positive expectations about upcoming deals in Greece. MIG gave support to the arguments by announcing the acquisition of a 30 percent stake in mid-July in Vivartia, Greece’s largest food company outside the beverage sector, where Coca-Cola HBC dominates. Since then, MIG has raised its equity stake in Vivartia further and is seen as holding more than 60 percent at this point. The entry of MIG, with firepower of about -15 billion, including leverage, and its stated intention to put its capital to work in Greece and Southeastern Europe, has created rising expectations about further M&A agreements and turned out to be instrumental in helping to push the ATHEX general index to fresh multiyear levels, above 5,100 points, around July 20. Speculation about ongoing negotiations between Alpha Bank and National Bank of Greece to revive the failed merger of 2001 also helped sentiment, as did corporate activity in the listed shipping companies. But expectations about a new round of M&A deals seem to have taken a back seat in the last 10 days or so as investor risk aversion has set in, hurting agreements. This has become a bigger issue as credit institutions and hedge funds report losses related to the poor state of the US subprime mortgage market. Turbulence The turbulence on credit markets has driven spreads, the extra interest corporations pay over government bonds of the same maturity, to new highs from admittedly historic lows in February. This has made borrowing more expensive but the real problem lies elsewhere. The inability of private equity and other corporate buyers to find financing for their acquisitions has caused investors to back off from buying the securities they sell backed by the pool of subprime mortgages and other risky loans. The ATHEX has, generally speaking, outperformed its peers on the downside this time, unlike in March 2007 or May-June 2006, when it took an even greater hit. Once again, the combination of strong second-quarter results by large banks and the receding but not eliminated prospects of new M&A deals is thought to be behind its outperformance, with betting primarily on MIG. On the other hand, it is no secret that conditions on credit markets and more difficult access to financing have made some private equity funds scanning the Greek market for opportunities more skeptical since they are waiting to see how this turbulence will end up. In the meantime, the Athens bourse is following more closely than before the direction of major European bourses. This means it has a higher correlation with the German DAX, French CAC 40 and British FTSE 100 index, something institutional portfolios looking for diversification do not particularly like. Assuming this market downturn is a temporary delay after a strong advance, widely known as a correction, it is not going to last for more than a month, a prediction half based on the length of past corrections since March 2003 when the rally started. So, if pundits are right, the conclusion of this downturn could occur at any point between now and the end of August. The evidence from fundamentals supports the latter case as well, even though we have not seen the flurry of bad news from the US subprime mortgage debacle come to conclusion yet. In this regard, the Greek government’s plans to hold early elections at some point in September may be lucky. Although hordes of Greek retail investors have left the Athens bourse since the burst of the bubble in 1999, its moves resonate well beyond the relatively small world of foreign and local traders, fund managers, retail shareholders and owners of corporations. The ATHEX affects economic sentiment, an important factor for the economy and the national elections next month. So, it is important that people go to the polls feeling good and the stock market can help to that extent. Therefore, assuming market consensus is right and this is a correction, it could not have happened at a better time for the government than August, when many people traditionally leave on vacation. So, the government may have an unlikely ally as it heads to the polls in September: the improved market sentiment and feel-good factor of a sizable chunk of voters. Of course, the jury is still out but past history sends a positive signal to the political party in power which has been jolted by a record number of fires and the scandal of structural bonds bought at high prices by state-run pension funds.