ECONOMY

Stock market counts its losses as foreigners leave

More than -24 billion has migrated from the Athens Exchange (ATHEX) in just 21 sessions since the start of year, many of which have been described as nightmarish for the domestic market. Large-capitalization stocks have suffered the greatest losses, with the FTSE-20 index dropping -16 billion. This has been the result of massive sell-offs by foreign institutional investors in an attempt to safeguard liquidity against the global credit crisis. A closer look at market developments over the past few months reveals that sell-offs by foreign investors actually began as of July 19, 2007, when the US mortgage crisis started having an effect on markets internationally. At that time, the news broke about the collapse of two Bear Stearns hedge funds, with large positions in lower security subprime loans. However, until the end of October 2007, foreign investors continued to enhance their positions in the FTSE-20, but the next month, November, the market witnessed a gradual peak in sell-offs. In the first month of 2008, developments started taking on snowballing dimensions, with more revelations about the extent of the US subprime crisis. Foreign portfolios investing in Greece started selling high-capitalization stocks indiscriminately in an attempt to secure liquidity, which eventually led to great losses. Such a development was to be expected though, as Athens had until recently been overperforming and was among the three European Union markets with the greatest profits since the start of the year. A conclusion that can be drawn here is that the liquidation frenzy by foreign investors in large-cap positions did not actually mean any change in policy but was a result of the existing asphyxiating conditions prevailing on all global exchanges. In October 2006, the share of foreign investors in the FTSE-20 stood at 33 percent, while at the end of October it rose to 58.73 percent and to 61 percent at the end of December. Historically, the reins of the domestic market have been taken up by professional portfolios since 2003, especially foreign investors, driving thousands of small-time investors out. On the other hand, domestic investors – both institutional and private – still remain on the margins of transactions. A survey by the University of Piraeus for 2003-2006 shows that domestic investors’ decisions have an effect only on small-caps and mid-caps, while foreign investors actively influence large-caps. In numbers, domestic investors make up 94 percent of all registered investors. However, the value of their portfolios equals up to 50 percent of total capitalization, down from 71 percent in September 2003. In the four-year period from 2003-2006, the number of domestic investors was up to six times the number of foreign ones but were at the same time net sellers, and this led to foreign investors enhancing their positions on the ATHEX. Foreign investors are 85 percent institutional and 15 percent private investors, with 60 percent of them coming from EU nations and 40 percent from third countries. Geographically, as much as 70 percent of the total number of transactions by domestic investors in the period under review was carried out by Attica residents. On average, 50 percent of domestic investors’ portfolios consist of stocks issued by one company, which points to insufficient use of defense techniques by diversification. They are thus exposed to risks that they could have easily and simply averted. Theoretically, a portfolio containing at least 20 to 30 different stocks can drastically contain risk. The fact that 95 percent of domestic portfolios include up to 10 different stocks is proof of the absence of risk-reducing conditions.