Pundits may have made the wrong calls on other stock markets last year but were absolutely right when it came to the Athens bourse. The Greek stock exchange registered its fifth consecutive winning year in 2007. However, the more challenging environment on international financial markets and signs of earnings fatigue in key Greek listed companies makes 2008 a more difficult year to forecast. The Athens Exchange lived up to expectations, producing double-digit gains for the fifth year since 2003. This does not mean that all stocks gained and everybody was happy. But it does mean that the majority of core stocks which make up the main indexes did very well. According to data from the MSCI-Barra stock indexes, which are used by the majority of international institutional portfolios as a benchmark to evaluate their own performance, ATHEX ranked fourth among all developed stock markets worldwide in 2007. The MSCI-Greece index gained 16.56 percent last year, compared to a mere 3.3 percent for the MSCI-Europe stock index and 7.04 percent for the stock index which is made up of eurozone markets. The hot Hong Kong bourse, which is benefitting from mainland China’s bull run, came first with gains of 37.83 percent in the local currency followed by Finland’s market with 30.79 percent and Germany’s with 19.53 percent. Defensive It is quite an achievement for the Athens bourse and indicative of its defensive characteristics in a more difficult international environment if one takes into account the fact it ranked 14th in 2006 while posting a return of 17.7 percent. The MSCI-Greece stock index ranked 7th in 2005 with a gain of almost 30 percent and had ended in third place with a return of 31 percent in 2004 when it hosted the Olympic Games. In 2003, when the current bourse bull run started, the Greek stock market came in second with gains of 35.79 percent behind Norway and Germany. It is unfortunate but many local retail investors have not reaped the benefits of the five-year rally. They have been trimming their stock holdings either directly or indirectly through the redemption of their domestic mutual fund shares during this five-year period. So, it comes as no surprise that non-resident investors account for 52 percent of the Athens stock market capitalization and some 60 percent of the large companies that comprise the FTSE/ASE 20 index of the 20 biggest listed companies. It is obvious that concerted efforts to instill confidence among local investors with respect to the bourse’s transparency and prospects have not succeeded in wiping away the stigma left by the excesses of the market’s heyday in 1999. It is therefore quite doubtful whether domestic interest in local stocks will rebound in 2008, and this will deprive Greek stocks, especially of small-cap companies, of an important source of demand. Fear of stagflation So, 2008 finds the Athens stock exchange more connected to international financial markets than ever before and the signs are not the most fortuitous as the chances of economic recession in the USA have risen and talk of stagflation – where inflation and recession or slow growth go hand-in-hand – has increased. Still, even if concerns are confirmed and 2008 turns out to be a flat year for world equities, the major indexes of the Athens stock exchange can outperform and produce annual returns of the order of 5 to 10 percent. Of course, returns will be higher if world equities rise and much lower if the five-year stock market rally comes to an end. Undoubtedly, it is quite normal for Greek equities to be more vulnerable after five years of double-digit gains underpinned by positive corporate earnings. But the Athens bourse can pull it off if the majority of core companies post financial results in line with or better than market expectations, since this would lead to upward revisions of their future profits. It is common knowledge that analysts and company investor relations officers start their presentations by pointing out Greece’s superior annual growth rates of around 4 percent. This is quite correct, for even if Greek GDP growth slows to 3.5 percent in 2008, it will still be one of the highest in the eurozone and quite supportive of sales growth of 6 to 8 percent, which would likely translate into even higher earnings growth. This is particularly true for companies with mostly domestic operations whose sales are dependent on the Greek economic cycle. However, a growing number of companies are generating an increasing proportion of their revenues from operations abroad, mainly in neighboring economies. The fact that these economies are projected to continue growing at a fast (though comparatively slower) pace in 2008 bodes well for these Greek companies. This applies in particular to large banks such as National Bank of Greece, Eurobank, Alpha Bank and Piraeus Bank. The banking sector is the key to the bourse’s performance so much depends on its ability to meet or exceed analysts’ earnings expectations. Mergers and acquisitions cannot be ruled out either but they would have to be on a large scale to affect banking shares. In addition there is OTE telecoms, which may turn out to be the merger and acquisition story of the year since it is in the best interests of both its major shareholders, i.e. the state and MIG (Marfin Investment Group), to find a foreign strategic investor. This means OTE’s share will be underpinned by expectations of corporate acts even if earnings do not fully satisfy investors. PPC surprises The Public Power Corporation (PPC) was the big positive surprise of 2007. This was due more than anything else to the government’s decision to approve the successive tariff increases requested by PPC’s management. Assuming PPC does some housecleaning and the state gives the green light for more tariff hikes, there are good prospects for strong profit growth. The only question is whether the good news has already been factored into the share price. For different reasons, Titan Cement and the state betting monopoly OPAP were the two disappointments of 2007 but may surprise pleasantly in 2008. The shares of Titan Cement registered considerable losses because of the company’s exposure to the hard-hit US housing market. OPAP shares also disappointed last year partly due to the market’s loss of faith in the management. But OPAP’s new management has made the right noises about strategy and, along with other factors, such as its large dividend yield, the anticipated pick-up of revenues on account of the European Soccer Championship this summer and benefits from operating its Stoichima game in-house, it may become the choice of many investors in a year of heightened uncertainty. Of course, there are other heavyweight companies such as Coca-Cola Hellenic Bottling, industrial holding company Viohalco, whose results depend greatly on economic growth and consumer spending, along with refineries Motor Oil and Hellenic Petroleum, which depend on refining margins. They will all make a contribution to the bourse’s progress in 2008 though it is hard to make accurate forecasts, with the exception of Coca-Cola Hellenic Bottling which seems to be on the right track. All in all, the Athens bourse can produce positive returns in 2008 even if developed market equities end up flat for the year, provided most Greek core companies, especially banks, do not miss their earnings targets and continue to be optimistic in their outlook for the 2009-2010 period. This last point is important because the shares of the majority of these companies are higher priced compared to their European peers, discounting superior profit growth rates in the future.