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Tuesday, January 15, 2002


A First Look at Greek Financial Markets in 2002

2001 was a year that Greek equity investors would rather forget, as the Athens stock exchange tumbled for the second consecutive year with the general stock index shedding about 23 percent. For Greek bond investors, however, 2001 was a memorable year, as government bond prices advanced. At the outset of 2002, the market consensus is for a relatively good but not spectacular year for equities, with no consensus for bonds given their dependence on global developments.

Greek government bonds tracked other European government bonds higher in 2001 aided by expectations of falling inflation in the eurozone and a series of official rate cuts by the European Central Bank (ECB). Greek bonds benefited further from increased volume in the Greek central bank’s secondary market – hitting a record high of 57 billion euros in November – as well as from being traded on the EuroMTS platform where eurobonds are traded.

The yield on the benchmark 10-year government bond fell to 5.1 percent at the end of 2001 from 5.8-5.9 percent at the beginning of the year. The widely quoted 10-year yield spread over bunds – German government bonds – fell to a record 32 basis points at the end of 2001 from 60 basis points at the beginning of the year (one percentage point =100 basis points). In general, Greek bonds track bunds and therefore respond more to developments in the eurozone. Since yields on long-dated European government paper follow the lead of the US market, Greek bonds follow suit, says George Kofinakos, head of Salomon Smith Barney’s branch in Greece. On the other hand, short-term notes with maturities of up to two years are primarily influenced by the ECB’s official rates and deposit rates.

The ceiling for the 10-year yield spread over bunds is Italy’s credit rating, adds Kofinakos. The 10-year yield spread between Italian and German bonds was around 28 basis points at the same time that the Greek-German yield spread stood at 32-33 basis points. Italy has a AA rating while Greece has an A- rating from international credit-rating agencies.

Kofinakos says that Greece has to tackle its social security problem and speed up structural reforms at the same time that it slashes its high debt-to-GDP (Gross Domestic Product) ratio for its credit rating to be upgraded to the Italian level. He also believes that the health of the eurozone and US economies will dictate official rate policy and therefore drive government bonds in 2002, making any predictions precarious. As far as Greek bonds are concerned, however, he points out that the country’s public-debt management has improved, resulting in a smoother amortization schedule.

While the outlook for Greek bonds is rather unclear at this point, there is hope that the Athens stock exchange will finally gain ground in 2002, following two consecutive years of steep losses. But do current valuations justify this cautious optimism?

It is generally difficult to gauge whether the Athens bourse is cheap or expensive, or even fairly valued vis-a-vis other foreign markets, since different stock market indexes may lead to different conclusions at different times. The most prominent local stock market indexes are the Athens General Stock Market Index, the FTSE/ASE-20 for large caps, the FTSE/ASE-40 for mid-caps, and the FTSE/ASE-80 for small caps.

Most analysts use the FTSE/ASE-20, which is made up of 20 large-capitalization stocks, to compare it to other well-known pan-European stock market indexes such as the DJ Euro Stoxx 50 or national market indexes. Using consensus earnings data for the companies in the FTSE/ASE-20 to calculate price-to-earnings (P/E) ratios for 2001 and 2002, and then comparing them to estimated price-earnings multiples of other stock-market indexes in developed European markets, one can conclude that the FTSE/ASE-20 ranks among the lowest indexes. However, the FTSE/ASE-20 may not be a good indicator of the attractiveness of the Greek bourse. Indeed, the mid-cap FTSE/ASE-40 is estimated to have a higher absolute P/E in 2001 but a slightly lower one for 2002 based on projected earnings.

A point of concern may be the fact that earnings-per-share growth in 2002 for many Greek companies was revised lower in October and November, following the announcement of their nine-month financial results. Some analysts caution that more downward revisions may be in the offing when companies publish their full-year income statements. A slowdown in sales growth in the last quarter of 2001, as well as more financial losses from cross-equity holdings, may adversely affect their bottom line, they say. However, poor fourth-quarter results are considered by many to provide a lower base for earnings-growth comparisons in 2002.

Nevertheless, the Athens bourse’s attraction has been enhanced by the reduced risk premium for foreign investors holding local equities. The risk premium is estimated to have fallen to 2 percent from 3.5 percent at the beginning of 1999, the year of the big bull run. (There are different methods of calculating risk premium. One of them is given by the difference between the required return on equities given by econometric models and the risk-free rate of return). This favorable development is attributed by some equity analysts to a significant drop in the level of the annualized volatility of Greek stock returns – currently estimated at slightly below 29 percent from about 38 percent in 1999 – as a result of the Greek economy’s convergence with the EU (The standard deviation of Greek stock index returns is used for volatility. This is always given in percentage terms). The same analysts point out that further convergence in risk premiums between Greece and the other European Union (EU) markets is on the way, as implied volatilities on the FTSE/ASE-20 and DJ EuroStoxx 50 (DJ EuroStoxx ) indexes indicate.

Another indicator that favors the Greek market to some extent is the so-called bond-to-earnings yield ratio that compares the 10-year government bond yield to the reciprocal of the P/E ratio. (It is the E/P) This ratio, which is used by analysts favoring the top-down approach to market valuation, hit a low in late October and headed higher after that, but still compares favorably at present with the same ratio in other EU markets.

However, everybody seems to agree that the biggest advantage of the Athens stock market is the projected high growth rates of the Greek economy in 2002 and beyond, outpacing the EU average by far. Greek GDP is expected to grow by 3.8 percent in 2002 after registering a growth rate of 4.1 percent in 2001. These high rates are expected to prop up corporate sales in 2002 although there are still lingering doubts as to whether their impact will be felt on the bottom line. Corporate revenues grew in excess of 10 percent year-on-year in the first nine months of 2001, but operating profits grew by less than 5 percent and earnings before taxes and minorities (money to be paid to third parties which hold a minority equity stake in the firm) actually fell in the same period, suggesting the need for cost-cutting and better cash and debt management.

Looking at sectors, there is no doubt that banks and telecoms dominate the Greek market, while beverages, building materials, and construction also play an important role in determining its direction. Major banks were particularly disappointing in the first nine months of 2001, posting a 12-percent, year-on-year drop in earnings. The market consensus has them doing somewhat better in 2002 although nobody can predict the impact of the announced National-Alpha merger on other banks.

For the second year in a row, the large Greek banks counted on strong net interest-income growth to largely offset a sharp drop in commission and trading income from capital-market activities. Healthy loan growth, a wider interest-rate spread between loans and deposits, and an improved asset mix in the banks’ loan portfolios as higher-margin consumer and mortgage loans increased, accounted for the significant growth in interest income. Some of these factors should be in place for banks in 2002 although the spread between lending and deposit rates is more likely to stabilize or even shrink a bit.

Some banks will also not be able to count on the capital gains from their bond portfolios as they did in 2001. On the positive side, it looks as if the steep decline in commission and trading income has run its course, and a recovery may be in the cards for the second half of 2002. To a large extent, the banks’ success or failure to generate satisfactory earnings growth will depend on their ability to contain costs while investing significantly in upgrading their information-technology systems, training their personnel, and hiring skilled professionals.

Telecoms constituted the star sector on the Athens bourse in 2001, outperforming the overall market. The stock price for OTE (Hellenic Telecommunications) did not benefit so much from the company’s financial results as from its very attractive valuation vis-a-vis other European telecoms, its satisfactory liquidity, and the large weight assigned to it in the benchmark MSCI-Greece stock index, tracked by passive foreign institutional investors. The company is not expected to produce high earnings growth in 2002, but a strategic alliance with a large European operator should not be ruled out.

Cellular operators Panafon-Vodafone and CosmOTE (a subsidiary of OTE) also benefited in 2001 for other reasons. Panafon was rewarded for being relatively cheap compared to the pan-European sector’s average – and Vodafone’s other European subsidiaries in particular – while CosmOTE performed impressively thanks to its consistent ability to beat market forecasts. Both companies are projected to grow at a slower pace in 2002 as penetration of the Greek market reaches average EU levels of about 77 percent.

In the beverage sector, the name of the game was Coca-Cola HBC’s better-than-expected financial results. Coca-Cola HBC is Coca Cola’s second largest bottler worldwide. Coca-Cola HBC’s earnings are expected to grow again next year, and the market seems to like its corporate strategy although its valuation is not cheap.

In the building materials sector, Titan and AGET Heracles, which belongs to the French Lafarge group of companies, dominate the sector. Titan shares trade at a premium to those of its European peers, but the company has managed to outgrow its rivals for years. Titan has embarked on an ambitious acquisition spree in the last couple of years, carefully targeting promising companies around the globe, including in the US. AGET Heracles shares are cheaper, but the company is in the middle of a restructuring program, and analysts are uncertain of its role in the Lafarge group. The construction sector has finally entered a phase of consolidation, but most companies trade at a premium to their European peers, lacking the required size and quality of management. On a positive note, the construction sector is expected to reap many of the benefits of Greece’s residential construction boom and projects linked to the 2004 Olympics.

All in all, the Athens stock exchange is poised for a mild recovery in 2002, but it will not be a smooth ride. In the event, the likely recovery of major European equity markets this year will also help drive the local market into positive territory.

Dimitris Kontogiannis is a financial columnist for the Greek daily, Eleftherotypia.
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