10 Apr Interview with Yianos Kontopoulos, CEO, Athens Exchange Group (ATHEX)
Greece’s capital market is booming and is now one of the best performing in the world this year. After the election in May 2023, the Athens General Composite Index shot up by 7%, topping a rise of nearly 30% since the beginning of this year and over 40% compared to the same period in 2022. To start this interview, tell us a little bit about which underlying factors have led to the triumphant return of the Greek capital market in 2023?
Well, 2022 was a horrendous year for global markets, not only because we had a substantial drop in global equities, but also because it coincided with a substantial drop in fixed income. That is an unlikely combination that you do not see often. It was within the last year that Greece managed to eke out a positive performance which put it at the top of rankings. This is not just a brag, but an indication of value and strong performance in a falling global market. Last year was an excellent one for the ATHEX, as it ranked second in global index performance among the largest global markets, with the ATHEX General Index up 39.1%, versus the Nasdaq’s 43.4%.
That is the reference in terms of the quality that we are seeing here in Greece. It tells you there is likely embedded value. Why is there embedded value? Roughly speaking, there are macro and micro arguments here. The macro arguments can be positioned in the context of the cycle. Structurally, there was a big effort in terms of effective reforms, in becoming responsible on the fiscal side, fixing the banking sector, and showing resilience to adverse conditions. All of this gives you some structural characteristics that attract positive attention, but those do not necessarily move the needle from year to year. What moves the needle is the macro components that are particularly valuable for this specific cycle.
The global cycle has three main fear components. You have the fear of a slowing global economy, the appearance after many years of inflation which has been persistent even if it is slowing down, and you have the reaction of policy makers that feeds back into the fears about slowing growth. On these three characteristics, Greece has effectively brought together, especially given the cycle, first the element of pent-up demand and that is demonstrated by effectively having double the rate of growth since 2022. That means the country has pent up demand or in economic terms, it has a large output gap. It is good to have an economy that can build that type of demand when global economies retreat.
The second point is that Greece also has a lower cost level exactly because of the travails of the past decade. Unit labor cost increases are fairly low. Nominal costs are also fairly low for a change now about 50% lower than the rest of Europe which does not mean Greece will not have inflation, it does, but at least since it is a global phenomenon, it has a bigger cushion. The third component which is relevant in this particular global cycle, again, because of what it went through and the adjustments we had to make, it is an unleveraged economy, especially in the private sector.
We have a lot more deposits in the system and deposits have been coming back in droves since 2019 than loans in the system. You very rarely find even in emerging markets in large emerging markets economy that will have fewer loans than deposits, let alone in an OECD or European country. That tells you that there is that cushion and it means that the economy structurally now as a whole for the foreseeable future can deal a little bit better with high or persistent interest rates.
Finally, on the micro side, we have the quality of listed companies. Those are firms that have gone through thick and thin in the past decade, and that have survived, done well, expanded in other markets, found new services and products. Those leading companies are very well accustomed to difficult cycles and have achieved record levels of profitability over the last 15 years, so it covers the period prior to the onset of the Greek crisis.
Roughly about the 70 companies that are distributing to their shareholders that average yield is above 5% and for the overall market is above 3%. These are good numbers to have and are also important components that support the outperformance of the market.
What kind of new trends are we seeing now that activity has returned to the market? What are the best performing companies, the biggest deals or mergers and acquisitions that have impacted the market?
About 60% of the capital market performance is tied to the banks, but that fluctuates. Part of the explanation behind these transactions was the government decision to use, after a long period, the stock exchange as a funding mechanism for capital markets in general. That has galvanized interest and capital in the markets and attracted enough attention.
The main example was the transaction by the National Bank of Greece. When you have a large enough transaction, it attracts interest from both new international investors that we have not seen for a while, but it also attracts attention from local retail investors who have either been inactive for a long period, or they were prompted to become participants in the stock exchange.
Large transactions of this sort and this divestment that we had from the government in the banking sector is a critical aspect. The bigger picture is large transactions, such as the one we are likely to see in February 2024 with Athens International Airport. This transaction is large and the part that is going to be given to the investment public is substantial enough that both large and small investors will be interested. When you have those large type of transactions, new investors come in, they will ask, what else do you have here? It attracts attention.
At the beginning of 2023, the government set up a new capital market strategy to guide the country into a new more sustainable era. Can you give us a description of the new focus areas and aims of the government’s new capital market strategy that was launched in February?
Because we were at the cusp of facing new elections at that time, there were fits and starts with the strategy. We are still passing some of the measures that were preannounced. Some elements of the plan relate specifically to the stock exchange, like the goal of increasing the level of economic knowledge of the general population which is a general aspect. More specifically, the plan is to try to pass incentives such as giving more incentives to companies to raise capital.
How do you do that? You implement action to decrease capital raising tax, so any time a company either within the stock exchange or outside is doing a capital increase, it pays a small tax. This tax will be cut from 0.5% to 0.2%. Another one relates to the transaction tax which is being halved. There are also incentives related to the cost of listing, so companies that decide to list will have a tax benefit in terms of using their associated costs of listing for other tax obligations they have. This will likely pass in early 2024 but was preannounced in early 2023.
There is an element of trying to balance the degree of tax rates between foreigners and locals on local corporate debt. There is also the likelihood of giving incentives to investors that would be investing in an alternative market especially as the discussion we are having is not only for technology companies, but any company that enters the alternative market. The alternative market is our small market that we, ourselves, are regulating as an exchange and it aims to grow companies, typically SMEs that have plans to grow aggressively, as opposed to our main market which is regulated by the Hellenic Capital Market Commission.
Up to a certain level of investment, retail investors in Greece will be able to use that type of investment allocation fully as a tax benefit. That will encourage risk taking to invest in companies that people were interested in but were less likely to do so unless they had some additional incentive. Some of these measures have been announced but have not yet been passed. Some of them by now have also been discussed and are likely to be passed in the next few months. This is the general aspect of the measures creating those types of incentives for people to participate in the market either by investing or by seeking investment using the exchange as the preferred way of doing so.
Along with the return of the market, ATHEX posted a 51% year over year rise in turnover in the last ten months of 2023. Can you tell us a little bit about this rise?
The turnover from average daily trading value was up by 50.6% in 2023 versus 2022, which is important. It did not just happen for a month or two, so it has shown that we have moved to a higher level of transaction year after year. Again, we are far away from saying that we are now liquid again to the standard that we would like to be, but given the size of the move, we are going in the right direction with relatively good speed, so I am encouraged by that.
The group’s strategy in 2022 involved increasing trade, optimizing services, improving inner operations, and introducing digital innovations. Can you tell us about how ATHEX is gearing up to accompany the growth of the capital market? What are you doing to embrace digitalization in your operations? What are some of the big steps that you have taken lately?
Along with the country regaining the investment grade rating, our goal as a stock exchange is to recover developed market status because right now, according to our own rating agencies, we are categorized as an emerging market. We lost that status in 2013, so any improvements that we do, we do them for the double purpose of either improving ourselves and getting ourselves to the next level, and along the way, increasing the chances that we are going to get to that developed market status.
In terms of technical innovations, there is a full range – one is decreasing the latency of our matching engine, which is one of the most important elements of the market. We invest in complex technology that we need to develop to the right stage. We have made significant improvement in 2023 and have plans to fall below one millisecond in terms of latency speed in 2024. In addition, we are creating an ESG digital portal whereby listed companies can contribute their data as we have helped them create a benchmark in terms of creating their ESG profile, and for use for the investment community to have data to use for their investing decisions. This is already in place as we finished this project in 2023.
It is an outcome of the buildup we started on our ESG path which started many years ago. Right now, we are at the forefront even with respect to other larger stock exchanges that do not have this type of tool, so I am proud because it creates the ultimate type of good for the market, which is information. We are in the business of providing information, price discovery is information, but information is also other bits and pieces which are increasingly relevant here, such as ESG.
The green investment trend is gaining speed. How are green investment rising and what does that mean for Greece’s capital market? How are things changing in this regard?
The Paris Agreement of 2015 kickstarted a firestorm of those type of initiatives trying to bring everybody towards a more sustainable future. Our large corporations are in a place where they are acting as leaders. They are at a different stage of the transition journey. They drive that. They are providing the necessary information and they can track in detail the impact of their investments and the impact they have on the supply chains. We have seen that in other large markets in Europe. The SMEs have limited resources, but this is where an organization like ours comes in and creates or minimizes the cost of either understanding or complying with those types of requirements.
We are trying to enhance transparency, help people achieve that and build trust and confidence in the markets. It is key to have high quality, sustainably related data and that is where the relevancy of the ESG portal enters the picture. In addition, back in early 2022, we built several Green Bonds. We have created the ATHEX bonds GREENet which is an inventory with detailed information of displayed bonds which are listed on the ATHEX market and whose Issuers who are following internationally recognized standards and use the proceeds to finance projects that are either green, social or a combination of both.
The government enacted the Green Climate Law in 2022 which is the first climate law to reduce greenhouse gas emissions to zero by 2050 in Greece. The law calls for the development of sectoral carbon budgets making it among the most progressive climate laws in Europe. There is also the Recovery and Resilience Facility (RRF) whereby 38% of the available funds are focused on measures that support climate objectives. The main element is to increase the share of renewables in the energy mix, through offshore wind parks for instance, reducing reliance on more traditional fossil fuels and to give an impetus for investments that are needed to upgrade private and public buildings, promote sustainable transport and support water supply management infrastructure.
There is potential still for things to happen. The legal framework and the legal incentive to do that is there, there is funding which completes the picture and you have ample availability of projects – that is all kickstarting and part of what is supporting higher growth than the rest of Europe. This is killing two birds with one stone.
There are sectors that are very important here and important globally for the transition, like Greek shipping, to some extent Greek tourism. There are hotels that are functioning at the top level of sustainability globally and the same thing for some of the shipping companies, but this is a race at this stage because people and entrepreneurs realize that they need to do this.
The USA has traditionally been the country’s eighth largest source of FDI, with major players participating in the market. How significant are US investors in Greece’s capital market, and what key areas are they focused on? How attractive of a market is Greece for US investors?
The sectors of the most interest to US investors are technology, energy, tourism, and shipping. When it comes to the actual listed universe in our Greek capital market, the direct portfolio investment from US-based companies is 13% of the total market capitalization in 2023.
With the latest upgrade by S&P and other rating agencies surely following these steps, what kind of additional movements or accelerations do you expect on the capital market with the funds that are expected to look at Greece?
There are essentially two distinct levels. The first is the upgrade of the sovereign rating to investment grade. The usual example that is very evident in Greece is when Japanese investors disappeared after 2010-2011 once when we lost our investment grade status. Investors who have a mandate to invest in investment grade countries simply could not do it. That does not mean all of it will come in one go or that there is not a segment in the market that steps in, in anticipation of this move.
The second level is the building of that, in which we are aiming to get ourselves to develop status as a public market which means that our audience will change. A lot of investors have a mandate globally to invest in developed markets or emerging markets. We are in the process of having this type of rotation in the type of investors that are looking at Greece. We are going to go from a slightly big fish in a small pond to being a small fish in an ocean. When that happens, hopefully we will be able to see coming into our watch list of 2024 from one of the rating agencies which means likely by 2025 we will be part of indices that are of developed market interest. So that is our plan and our objective, and it will have tangible change and effect both in terms of the make-up and the size of potential investments now on public markets.
What would be your final message to the readers of USA Today?
Given the outlook in the investment gap that we have realized in the last decade, we have significant room for growth even in a moderate, or slightly challenging global market backdrop. Idiosyncratically, Greece is set to outperform.