The great expectations, milestones and challenges of the new year

By Leonidas Stergiou

A well-known market saying says that if one wants to see in time where the money will go, it is enough to see what the banks are doing for themselves. If so, it’s worth taking a look at the milestones, goals and forecasts they have set. But also in the rules that follow. Rule number one: “the trend is your friend”. Rule number two: Buy industries that have room to raise prices in times of inflation.

The bankers’ agenda is divided into quarters. Each quarter has targets, which are quantified, the sectors are identified and the investment inflows that will be realized are calculated. These calculations translate into demand and investment interest, which will have an impact on growth and the Athens Stock Exchange.

The first goal is the disbursement of the first funds from the Recovery Fund. The second goal is to achieve single-digit percentages of red loans, which is a critical step in upgrading the banks and the Greek economy to an investment level. The third goal is the realization of the pending issues from the era of the Memoranda so that Greece can get out of the increased surveillance. Also, a criterion for upgrading to an investment grade. The fourth goal is to raise funds from the markets, front-end, both from the State and from the banks, in order to take advantage of the low interest rates. The fifth goal is to make investments of at least 5 billion euros by the end of the year, through the Recovery Fund.

Banks also have a habit of talking in numbers. For example, they have calculated how much capital can be invested in the Greek real estate market before a bubble is created. This study has been done by one of the systemic banks, taking into account the business cycle and financing by sector. The model indicated that the housing market could be financed up to 15 billion euros. For 2022, it is estimated that at least 1.25 billion euros will flow into Greek real estate, only from households and mortgages. These do not include additional inflows of 3 billion euros from the Recovery Fund until 2026.

Corresponding calculations have been made by all banks for investments by sector, both through the Recovery Fund and due to the forthcoming deals.

First trimester

In the first quarter of 2022, the first funds are expected from the Recovery Fund, most likely in March, amounting to 3.7 billion euros. The Recovery Fund, in addition to financing, grants and mobilization of funds, will bring new needs for loans even from sectors not related to this program. This is the multiplier that the banks have estimated at 10 billion euros by 2024. This 10 billion includes the financing needs of households, mainly for mortgages, but also for consumer, with the main target market being cars, and in fact the electric ones. There will also be a demand for “Save” programs.

All this means that parallel sectors and professions, such as construction companies, suppliers and customers of large companies that will initially benefit from the Recovery Fund funds will also benefit. Indicatively, investments in the real estate market are going to exceed 1.2 billion euros in 2022, only through household mortgages. The banks’ forecasts for the Greek real estate market are estimated at an average growth rate of 4% -5% in 2022. At this rate it will move at least until 2027. From the analysis of their models, the single-digit growth rate is the one that will keep the Greek real estate away from bubble phenomena. Another factor is the increase in supply with the creation of new structures that had been frozen throughout the crisis that began in 2008.

Banks have already measured investments in each sector, according to contacts they have made with entrepreneurs. The largest amounts will be invested in energy, in particular in green forms and energy storage technologies. A total investment of 6 billion euros is estimated by 2026. The other large sector with the highest investments is that of shipping, where a total of 10 billion funds will be mobilized.

Also, the bookings of the first quarter will show the course of tourism, where investments through the Recovery Fund are estimated at 4 billion euros. If it is confirmed that in the first quarter the reservations will exceed 65% of the availability, then the receipts will exceed those of 2019 and will give the projected growth rate at least one percentage point, which can be further increased if the Recovery Fund investments are implemented. program. Respectively, in infrastructure, including privatizations, they expect investments of 5 billion euros by 2026 and in industry and processing 4 billion.

Second semester

From April to May, the interest is focused on all the necessary moves to accelerate the upgrading of the Greek economy. For their part, the four systemic banks will have reduced red loans to single digits.

The main bet is the fulfillment of the obligations undertaken by the Greek government in order to get out of the enhanced surveillance. Bankers and the government have already agreed on a common narrative to foreign investors in order to persuade and expedite the investment grade from the rating agencies.

At the same time, the banks will have proceeded with total raising of funds, through bond issues, mainly, of a total amount of 2 billion euros.

Something similar is expected from the Greek State, which plans total issues of 14 billion euros. The forward movement is to take advantage of low interest rates, as long as they are not seriously threatened by inflation and a change in the ECB’s monetary policy.

However, they do not plan to sell all the issues in the first half of the year. Their reasoning may be an inspiration of investment importance. The first reason is that global demand for capital is expected at the beginning of 2022. Therefore, part of the capital can be sought in the second half or towards the end of 2022. The possible increase in money costs in the second half is estimated to be partially offset from the discount of the investment grade upgrade. The word “partially” is used by banks because their models show that already in Greek bonds and Greek stocks the upgrade to investment grade has almost been discounted by markets and foreign investors. This is most evident from the interest rates and yields on corporate bonds issued. Also, from the risk premium reflected on the board of the Athens Stock Exchange.

Third quarter

Looking at the course of tourism, banks and the government expect an upward revision of the growth rate of the Greek economy, which will facilitate both fiscal policy and public debt management. The expected catalyst is the expected decline in inflation, energy costs and the pandemic.

Fourth quarter

This is, perhaps, the most critical quarter of the year. This is what banks and the Greek government will have to show through investments made through the Recovery Fund, a high growth rate and the refutation of forecasts for new red loans and a deterioration in the labor market.

At the end of the fourth quarter, optimistic voices do not rule out the upgrade of the Greek economy to an investment level and the inclusion of Greek bonds in the QE and the ECB APP. However, most banks converge on the assessment that the upgrade is more likely in 2023.

Risks and upheavals

The main risks, as pointed out by the Bank of Greece and other organizations, are identified in the following areas:

-First, pandemic outbreak, in the face of inflation and high energy prices, which will affect economic activity and demand.

-Secondly, surge in the deficit due to high domestic demand (imports), which will gnaw at growth and ignite inflation.

-Thirdly, delays and inefficiencies in the disbursement and utilization of Recovery Fund funds.

-Fourth, appearance of the problems of the Greek economy with the withdrawal of support measures, with the labor market and the increase in red loans as the first victims.

-Fifth, high dependence of banks on government bonds and deferred taxation, that is, increased interconnection with the state. An increase in yields and a fall in bond prices will cause huge losses in the valuations of the bond portfolios of banks, which currently hold 30 billion euros in securities.

Investment strategy

So far, the basic scenario of analysts and markets suggests that in 2022 growth rates will be lower than 2021, but also significantly higher than the long-term. Such a scenario would remain positive for equities and corporate bonds, and for emerging country bonds.

The “inflation” factor has begun to appear as a non-transient phenomenon, resulting in a shift in the rhetoric of most central banks to a stricter one. This shift has so far had a limited impact on the markets and at this stage we do not see the volatility that could occur, due to expectations of declining liquidity, in the current overburdened and over-optimistic economic environment.

In the bond markets there are pressures that are still mild, given the dynamics of growth and inflation. The limited uptrend in long-term bond yields is probably explained by the potential threat of stagnant inflation, but not in the sense of the simultaneous recession and inflation of the 1970s. Thus, in 2022 there is a risk of a sharp slowdown under the long-term growth trend, with inflation remaining higher. This scenario would not be positive for stocks and high-risk bonds.

However, corporate profitability expectations remain satisfactory, while liquidity remains high. Given this trend, a defensive investment strategy could be chosen due to inflation concerns. In stock options, they can focus on industries and countries that benefit from the observed rise in energy prices and bond yields.

In the foreign exchange market, the dollar has strengthened by about 5%, as inflation in the US appears stronger than in other developed countries. The strength of the dollar remains upward and analysts expect this to continue in the short term. The US currency, however, is beginning to appear expensive in the long run.

Commodities maintain significant upward momentum, mainly due to supply-side problems and supply chain issues, but also due to geopolitical events that are difficult to assess. Fundamental figures lead analysts at major corporations and banks to conclude that a downward trend is more likely.