Greece has been the EMU champion of economic growth this year on the back of a healthy pickup in consumer spending and still robust investment spending underpinned by large EU inflows. Yet the Athens Stock Exchange has been one of the worst-performing bourses so far this year, prompting some high-level government officials to say its performance fails to take into account the Greek economy’s growth credentials. They are not right. Listed companies’ top line reflects Greece’s strong GDP growth but this fails to show up on their bottom line due to weak financial income and negative equity valuations. But a closer look at the operating profit margins of non-financial firms shows that they are relatively high compared to other EMU firms, posing a challenge for the future which cannot be ignored for long. Indeed, the Athens Stock Exchange is the worst performer among developed world equity markets so far in the fourth quarter. The MSCI-Greece index, widely used by foreign passive institutional portfolios as a benchmark, was registering losses of 6.10 percent from October 1 through October 25, followed by MSCI-Japan with a 5.5 percent loss. In addition to this, figures show that the MSCI-Greece index is third worst performer year-to-October 25, trailing only Sweden and Germany. The MSCI-Sweden index posted a 43.71 percent loss year-to-October 25 followed by MSCI-Germany with a 40.26 percent loss and MSCI-Greece down 38.12 percent. On the other hand, the Greek economy grew by 4 percent year-on-year in the second quarter, propped up by a 9.8 percent increase in investment spending and a 1.6 percent rise in consumption spending. The numbers were even better in the first quarter, with real GDP growing by 4.3 percent on the heels of a 11.7 percent rise in investment outlays and a 3.6 percent rise in consumption. This strong growth was depicted on listed non-financial companies’ turnover in the same period, just as it should. Indeed, based on aggregate first-half data published by all listed non-financial companies, sales rose 6.3 percent year-on-year, according to the National Bank of Greece (NBG). Excluding the petroleum sector, sales grew by 10.7 percent year-on-year in the first half. Including the financial firms, that is, banks, insurance companies, etc, turnover growth was slower but still remained above 5 percent. Analysts expect listed companies’ nine-month sales to be somewhat weaker on the back of an expected slowdown in GDP growth in the third quarter. So, despite claims to the contrary, the Greek economy’s good overall performance was reflected in listed companies’ turnover in the first half although it was easy to detect large differences in sales performance from company to company and sector to sector. Nevertheless, satisfactory sales growth helped support operating profits. According to NBG figures, operating profits, excluding petroleum, increased by 4.1 percent year-on-year in the first half. At the same time, earnings before taxes (EBT) for non-financial firms were almost flat, up just 0.2 percent, recording a decrease of 6.9 percent if one did not include Public Power Corporation’s (PPC) first-half results. As is easily understood, the difference between operating and EBT stems from heavy financial losses linked to the Athens bourse’s steep decline. Even though investors, especially Greeks, seem to pay more attention to bottom-line figures, the poor performance of EBT even in the face of satisfactory sales growth should not be alarming. After all, extraordinary financial losses can easily turn into extraordinary capital gains when stock markets stabilize and even rise. Following what seems to be a three-year market decline, there is a good chance for an equity market rebound next year, so negative valuation effects on corporate profits should ease or even reverse. This is true for all bourses and for the Athens Stock Exchange as well. What should be a cause for concern, though, is both the fact that operating profit margins, defined by the operating profits-to-sales ratio, of Greek non-financial firms are on a downward course and the fact that these margins, calculated by NBG, at 12.6 percent, are much higher than those encountered in other EMU countries such as Germany, France and Italy. There, operating profit margins stand at 3.9 percent, 4.8 percent and 10.5 percent respectively. Analysts point out that Greek profit margins are even bigger in reality because depreciation charges, a non-cash item, are included in the firms’ operating expenses under Greek accounting standards. This means their reported operating profits are depressed and their operating profit margins are in reality much bigger. To understand the amounts involved, the experts say one has to take into account the fact that capital goods may be depreciated in Greece over a five-year period – which is very short, by all standards. The government reportedly wants to change this in recognition of the fact that the lives of capital goods extend far beyond the five-year period. Although the majority of Greek firms are used to operating with relatively large profit margins, the same analysts contend this may turn out to be a source of weakness in the future. They say competition is bound to increase in the years ahead as the introduction of the euro facilitates price comparisons and regulatory reform opens up some «protected» sectors, compressing firms’ operating profit margins. If this is the case, then one should expect Greek firms to continue to rely heavily on good sales growth to deliver satisfactory operating profits and as a result, good bottom-line earnings. However, good sales growth goes hand-in-hand with strong GDP growth, a reasonable forecast for Greece for the 2002-2004 period but doubtful post-2004. So, Greek firms have no other option but to use this period of grace to bolster their operational efficiency in order to be able to prosper in the years ahead. Greece’s strong GDP growth figures underline Greek non-financial firms’ satisfactory sales growth, which feeds into operating profits but not into their bottom line due to weak financial income. Nevertheless, Greek non-financial firms continue to operate with much higher operating profits than their counterparts in the eurozone. Since it is likely that they will not be able to rely on strong sales growth to boost their operating profits post-2004, the only way to cope with the more demanding competitive environment in the future is for these firms to take measures now to enhance their operational efficiency. This way they will assure weary investors of their good profitability prospects and boost their stock prices.