It took just three consecutive winning sessions and a cumulative gain of 4.52 percent in the general index last week to revive hopes that the dormant Athens Stock Exchange (ASE) is finally coming out of its long-term downward trend dating back to mid-September 1999. Does the latest mini-rally constitute a major turning point for the local stock exchange or is it just another short-term rally in a bear market? Given the fact that the latest advance has not been fueled by fresh economic or corporate news but rather by fresh capital injections, one has to wonder whether this is just another attempt by state-controlled pension funds and other institutional funds to shore up the bourse in the hope of luring back some disenchanted individual investors and rekindling interest in the local market. Market participants agree that the late mini-rally is mainly due to fresh money flows from state-controlled pension funds, other institutional money and some foreign funds. They seem to disagree on the contribution of local and foreign funds. Part of the disagreement stems from the fact that it is difficult to pinpoint whether buying orders from abroad are being given by offshore companies linked to domestic interests or just plain foreign institutional funds. The rebalancing of the Morgan Stanley Capital International (MSCI) standard indices at the end of May, which is projected to result in a slight increase in Greece’s weight, is likely to have a positive liquidity impact on the local market. However, officials working for well-known international investment houses in London warn that these inflows will be rather limited and the bulk of buying on a few large-caps has already taken place. Although the general impression among market participants is that foreign funds left the Athens bourse in droves at the end of May 2001 upon its graduation to the developed markets’ league, this is not supported by the evidence. Based on the most recent data provided by the ASE, foreign funds owned 32.2 percent of the 20 Greek large-caps comprising the FTSE/ASE-20 stock index at the end of February versus 27.7 percent at the end of May 2001, when MSCI upgraded the Athens bourse to developed market status. During the same period, Greek institutional funds reduced their share to 15.3 percent from 18.7 percent on May 31, 2001. The fact that foreign buying has been gradual, sometimes in the form of blocks of shares, and focused on a few well-known Greek corporate names, has helped create this impression. The latter has been reinforced by the sharp reduction of positions in small and medium-sized Greek caps since early June 2001. Putting aside disagreements over the exact breakdown of recent domestic and foreign institutional buying, there is no doubt that last week’s rally is mainly liquidity driven. Is it justified, though, by technical analysis and fundamentals? There is no clear answer. On one hand, the Athens bourse had been oversold lately and from that point of view, a technical rebound was on the cards. Moreover, it has underperformed the majority of other developed markets since the beginning of the year. Indeed, figures show that MSCI-Greece recorded the fourth largest drop among developed equity markets worldwide from the beginning of the year until last Friday, May 10. The national MSCI index registered a 13.57-percent loss year-to-May 10 versus a 30.97-percent loss for the MSCI-Finland index, which is dominated by Nokia, a 17.42-percent loss for the Swedish index and a 14.25-percent one for MSCI-Ireland. The MSCI-Euro index fell 7.61 percent in the same period. Interestingly enough, the Greek stock market has outperformed all other developed markets since the beginning of May. On the other hand, the first-quarter financial results of heavyweight banks have been a disappointment and many analysts expect the results of the majority of other listed companies to be either in line or below consensus estimates. This means that downward revisions are likely to outpace upward forecast revisions, undermining the case for cheaper valuations vis-a-vis their European peers. If so, the large drop in share prices will be offset to a large extent by similar drops in estimated earnings per share, making it harder to justify a sustained drive higher on economic fundamentals. Where does this all leave us? History has shown that liquidity injections can do wonders if supported by a good macroeconomic environment, good corporate results, serious M&A activity and favorable foreign market conditions. Without most of the the latter, it is doubtful whether a boost in liquidity can sustain the market’s upward momentum. It is a favorite tactic of banks to adopt changes retrospectively, modifying previous years’ figures for the purpose of comparison. However, even this practice serves the purpose of minimizing the difference between the results of the two years. Nevertheless, this is an old-fashioned method, not appropriate for banks, which constitute the engine of growth and have a significant weight in the stock exchange.