Greece may still become an emerging market – again
Greece is still at risk over the long term of becoming the first economy to be relegated from developed to emerging market status within investment indices, even if it has fended off any immediate exit from the eurozone.
The unprecedented switch, reversing a path Greece trod only 11 years ago, would cut the country off from investors in more sophisticated markets although it would open it up to fund managers who are more comfortable with risk.
Stock index compiler MSCI, which has $7 trillion benchmarked against its indices globally, has classified Greece as a developed market since 2001, based on criteria of market size and liquidity, investor access and the country’s overall wealth.
A Greek exit from the euro, still viewed as a possibility after a narrow weekend election victory for parties which back the country’s EU/IMF bailout deal, would not mean an instant demotion. But if a currency devaluation drastically reduced the country’s wealth in dollar terms, or if Greece were to set up curbs on capital movement, an ejection could follow.
The normal process of shifting a country from one MSCI index to another can take years. South Korea, for example, has been under consideration for an upgrade to developed market status for four years with no change to date.
A sudden crisis, on the other hand, could accelerate things.
“If countries start to impose stringent accessibility restrictions, these may force us to act more quickly,» said Sebastien Lieblich, head of index management at MSCI.
A sharp devaluation could also bring Greece’s annual per capita income far below its 2010 levels of around $27,000.
MSCI’s income criterion for a developed market is currently 25 percent above a World Bank threshold of $12,276, or a little over $15,000.
“Greece would have quite a long way to go before it fell below the threshold, but these days anything is possible,» Lieblich added.
Greek debt has been in no-man’s land for the past two years, after its bonds were thrown out of flagship global bond indices following a downgrade of its sovereign credit ratings to «junk.”
Because most of Greece’s debt is euro-denominated, it lacks a stock of liquid dollar bonds that might enable it to gain access to emerging market bond indices compiled by JPMorgan and so attract investors who favor riskier emerging debt.
In equity markets, plunging prices mean Greece currently makes up only 0.1812 percent of MSCI’s EMU index and a tiny 0.0193 percent of the MSCI global markets index.
Even without Greece’s economic woes, this means it is unlikely to attract much of the $250 billion held in Europe-focused mutual funds, according to data from Lipper Global.
MSCI says a Greek exit from the euro would trigger an automatic ejection from the company’s EMU index. But the process of transition to emerging market is a slower one.
It would involve a review by MSCI, which would be likely first to designate Greece as a Standalone Market.
Something similar happened to Pakistan, which was kicked out of the MSCI Emerging Markets indices in Dec 2008 following the introduction of restrictive rules on stock market trading. Pakistan first became a Standalone Market and was only included in the frontier markets index some months later.
Greece would need to reach the emerging market index before its assets attracted attention from many emerging equity funds.
But a relegation to emerging market status might not be all bad news for the country’s stocks despite the loss of prestige. Greece actually lost investors when it was upgraded 11 years ago, as its share of developed market indices was much smaller — 0.13 percent, against nearly 5 percent of the emerging index.
Israel also lost out when it secured developed market status in 2010, seeing foreign investment flows into its stock market dwindle from $2 billion in 2009 to almost zero a year later.
Some active fund managers might not even wait for official reclassification of Greece as an emerging market to invest.
“As stock-pickers, we do not care which country a company operates in, we look at the cost of equity,» Kim Catechis, emerging market fund manager at Martin Currie, told a briefing this week. «If Greece were to come out of the developed index, we would look at the companies in the same way as we look at any other equity.”
Veteran emerging market investor Mark Mobius told a briefing last week that Greece could become an emerging stock market: «It’s quite possible if it goes back to drachma it may qualify, if the per capita income goes down.”
Mobius said Greek companies that would be a good fit for emerging stock indices included those with operations in emerging markets such as luxury retailer Folli Follie (HDFr.AT).
But the country’s high debt levels may also be enough to deter die-hard emerging market investors, who have seen fundamentals in many traditional emerging markets vastly improve in the past decade or more.
“The likelihood of sensible emerging market investors investing in Greece right now is close to zero,» said Jerome Booth, head of research at Ashmore Investment Management.
“In a few years’ time, after a devaluation, it might make more sense, but I wouldn’t invest in it. I don’t invest in risky markets where the risk is not priced in.» [Reuters]