Enter the new reality

Disappointed by the Athens stock market’s dismal performance so far this year, dismayed by the low money market rates and the slump in formerly immensely popular government bonds, the average Greek investor has started looking for investment opportunities abroad. However slow this process may be at first, it will eventually reshape the country’s financial services industry in the years to come. Those who fail to grasp the new reality will pay the price and will have nobody but themselves to blame. The Athens bourse’s general index lost 0.73 percent to close at 2,316.78 points on Friday and the yield on the benchmark 10-year government bond rose to almost 5.6 percent, a level that has not been seen for many months as the 10-year German government bond (Bund) hit an 18-month high at 5.252 percent on concerns about persistent inflation in the eurozone. Faced with this unfavorable investment landscape, it looks as if more and more local investors are willing to try something new. Sensing this new reality, local brokerages started opening accounts for those investing in foreign stocks some time ago, but the response seemed to be lukewarm as recently as a couple of months ago. The latest word from the same brokerages is that they see increased interest from Greeks in investing abroad. But it is not just stocks. It is bonds as well. The latest figures from the Association of Greek Institutional Investors speak loudly. It was only the foreign and international bond funds which saw net inflows of 16.8 and 0.18 million euros respectively in the period from March 1-March 20. Foreign bond funds invest 65 percent or more of their total assets in foreign fixed income securities, calculated on a quarterly average, whereas international bond funds invest in both domestic and foreign long-term fixed income securities. By contrast, domestic bond funds experienced net outflows of 78 million euros in the same period. The move is somewhat surprising because Greek government bonds are known to track benchmark eurozone bonds such as the German Bund and therefore their yields are closely correlated. Some may attribute this to the low sophistication of the average investor. However, a different conclusion may be reached if it is in fact due to the average investor’s preference for higher risk in exchange for a higher return provided by corporate bonds. A similar but less pronounced shift was seen in equity mutual funds whereas net outflows from domestic equity funds amounted to 29.63 million euros in the first 20 days of March and foreign equity funds experienced a net inflow of 11.97 million euros in the same period. Even in the balanced mutual funds category, foreign funds did have small inflows versus large outflows by domestic balanced funds investing in stocks, bonds and money market instruments. The gradual portfolio shift towards international securities should continue in the years to come as more and more local investors understand the benefits of international diversification. However, this shift will undoubtedly have repercussions on the stocks of Greek companies which fail the competitiveness test. It should have a negligible effect on Greek government bonds since the local market is dominated by large foreign institutions, banks and pension funds, and just a few large local banks. However, local banks and mutual fund companies stand to lose customers and a vast amount of money in the years to come if they fail to comprehend the evolving trend and take steps to address the needs of their customers. This means they have to use their branch networks to sell their clients new investment products, some of which may belong to their competitors. This may not be so easy as it sounds. The vast majority of bank employees do not know these products and therefore cannot sell them to customers. Moreover, some, especially salesman at branches of mutual fund management companies, sabotage them because they fear they will lose their jobs. To make things more complicated, the 20-percent withholding tax on income earned from holding mutual fund shares offered by offshore companies renders some of these products less attractive to potential customers and has created a tax evasion industry. Slowly but steadily, Greek investors will look abroad for investment opportunities in the next few years. This process is not unique to Greece and has been observed in other EU countries. Faced with this new reality, the Greek financial services industry will have to live up to the challenge and stay competitive. That means enriching its product mix and training its personnel to satisfy the needs of its customers.