Bailout exit failed to attract investors, who want stability, reliability and growth

Greece’s formal exit from the bailout programs was no “milestone” for investors, as is more than evident by the lackluster performance of the Athens stock exchange and Greek bonds.

Instead of putting Greece back on their radars, foreign funds chose to keep their distance by maintaining the cautious reserve that has defined sentiment over the past months and was also expressed at the road shows held in London and in the United States over the summer. The Athens stock exchange has dropped 20 percent from a three-year high in February, while Greek bond yields are still at around 4.2 percent, a prohibitive level for any new issues.

This reticence on the part of investors is attributed both to the challenges facing the Greek economy, despite its exit last Monday from its third adjustment program, and to the international environment, which has deteriorated on the back of turbulence in Italy and Turkey.

Analysts and economists who spoke to Kathimerini said that the short-term prospects for Greek stocks and bonds do not look good and will continue to be affected by the climate abroad – especially in emerging markets – as well as by the progress of implementation of Greece’s commitments to its lenders.

Key domestic developments that could shift the mood among investors are general elections, a positive surprise from the growth front, an acceleration in the process of clearing nonperforming loans (NPLs) and a succession of upgrades by international rating agencies.

Progress in implementation of Greece’s pledges to international creditors appears more important to investors than international developments, one fund manager in the City of London tells Kathimerini. The reason is that while external turmoil may drag Greece down in the short term, foreign developments still tend to have less of a long-term effect than domestic ones. Any indication that the Greek government is relaxing the pace of reforms or offering new handouts, for example, would certainly have a negative effect and prevent Greece from tapping the markets at reasonable rates.

The elections that are expected to take place by the fall of 2019 – if not earlier – meanwhile, may indeed bring a fresh air of optimism and boost Greek assets for the first time after several years, but it is customary for there to be a certain amount of uncertainty until any result is finalized.

According to Teneo Intelligence Co-President Wolfango Piccoli, however, the prospects of Greek stocks attracting the attention of investors remain very limited because of international turbulence, regardless of any domestic developments or credit upgrades. The most important domestic factor, in his opinion, is that Greece does not have a plan outlining a long-term, sustainable growth strategy. Policymaking tends to be extremely short-term and there does not appear to be an agenda to this end, he notes, adding that a change in the domestic political landscape could be important for investors.

“Investors do not believe that the current government can deliver and implement such a strategy,” he said.

Athanasios Vamvakidis, head of European G10 foreign exchange strategy at Bank of America – Merrill Lynch, believes there are three factors that can boost investor interest in Greek stocks and bonds. To begin with, “growth has to start surprising to the upside, while it is mostly surprising to the downside so far.”

“Second, the government has to stick to the agreed targets and the agreed reforms in the post-program period and ahead of the next elections, and avoid populism. And third, we need to see faster progress in dealing with the banks’ nonperforming loans. In this case, rating upgrades will follow, yields will decline, and equities will perform,” Vamvakidis added.

Upgrades from rating agencies and a positive first post-bailout review will go a long way towards improving the investment climate in Greece, Wood & Co Financial Services’s co-head of research, Alex Boulougouris, told Kathimerini. “However, I do not think there is a specific trigger. The confidence building exercise takes time and (especially for the banks) the investors need to be convinced that there will not be any dilutive capital action,” he said.

Six steps

Beyond the short-term turbulence that is expected from the rebalancing of the MSCI index, there are certain developments that could draw investor interest to the Athens Exchange, according to Nick Sakarelis from Wealth Fund Services.

First, the general index is very unlikely to rise without help from bank stocks, which means that the updated business plans Greek lenders will be submitting to the European Central Bank for the reduction of NPLs will be instrumental in defining their course. Reducing exposure is critical, especially after losing the ECB’s waiver and in light of the fact that deferred tax assets make up a high proportion of the banks’ capital.

The second development centers on privatizations. Progress in the investment for developing the plot of the old Athens airport in Elliniko and the sale of Hellenic Petroleum would signal that commitments made prior to the end of the bailouts are being implemented.

Then there is the course of the real economy, public revenue and tourism, and the effect they would have on gross domestic product. The Greek market has one of the lowest market capitalization-to-GDP ratios, and there is clear room for improvement.

In regard to political developments, if early elections are called for any reason, the stock market would anticipate a change to a more pro-business government.

Despite the cautious sentiment in emerging markets, the strong euro could divert capital flows from politically and macroeconomically unstable economies like Turkey and Russia towards a market like Greece.

If, moreover, there are further upgrades by rating agencies, we will also see capital returning for technical reasons. The image of the bond market will improve, the country’s risk factor will decrease and many stock price targets will be revised upwards. This would also likely improve Greece’s market classification on indexes like the FTSE and MSCI, resulting in an inflow of capital. This could, in turn, attract funds for long-term investments.