Greece: back in the EM class

When index provider MSCI reclassified Greece as an EM back in June, there were a mixture of jokes doing the round about “submerging” rather than “emerging”.

Fair enough. On Thursday, S&P Dow Jones Indices agreed, moving Greece down to EM as well. But what’s the actual implication? What stocks will be included?

S&P Dow Jones said in its statement:

The general consensus among participants is that emerging market status is a more appropriate classification due to the following reasons:

  • The Greek equity market lags behind the advancements in market practices typical of other developed markets.
  • Dramatic and consistent reduction in market size over the past few years.
  • Failed minimum credit ratings criteria: Greece is currently rated as B-; minimum is BB+
  • Failed market accessibility criteria: Restrictive securities borrowing and lending facilities.
  • Lack of ease in transferability – market participants pointed out the difficulties in dealing with in-kind transfer and with off-exchange transaction-like facilities that make trading in the local market extremely challenging and impractical.

Like a kid asked to stay back a year in school, Greece may actually benefit from being in the lower class, at least as far as some of its stocks are concerned. (However, being put in an EM index isn’t going to do anything to the country’s fiscal position.)

As Deutsche Bank said in a recent note, which examined the effects of the MSCI change (with our emphasis):

There are currently only two Greek stocks in any relevant MSCI index – OTE Hellenic Telecom and OPAP. However, demotion to emerging status gives the opportunity for smaller and less liquid stocks in Greece to join the MSCI universe, having failed to meet the more stringent criteria for inclusion whilst Greece was classified as a developed market. This means that the number of constituent Greek stocks could rise from the current level of two to a maximum of eleven. The clearest implication of this is that although Greece will still be a small constituent of the EM universe (up to 0.419% weighting), its prominence in this space will still be far higher than it is under its current classification as a developed market (0.020% weighting).

So which are the stocks? Deutsche reckons a working list could be:

  • OTE Hellenic Telecom
  • OPAP
  • National Bank of Greece
  • Public Power Corp
  • Titan Cement
  • Hellenic Petroleum
  • Jumbo
  • Folli Follie Group
  • Alpha Bank
  • Viohalco Copper
  • Motor Oil Hellas

But despite the fact that Greece doesn’t formally go back to the EM group until November, the market has already got to work. From Deutsche again:

The subset of 11 Greek stocks which could potentially join the MSCI EM index have seen a rally of +50.7% in absolute USD terms since the first announcement of Greece’s demotion was made on 11 June 2013. This period marks the biggest and most sustained rally seen in Greek equities so far this year.

Source: Deutsche Bank, Thomson Datastream, Bloomberg

But for all the talk of submerging markets, Deutsche points out that Greece was really an EM all along – it only joined the DM list in 2001, and that it has really reverted to its original state.

Welcome home, Greece. There’s room in the EM classroom for you. Just don’t slip down to the frontier section.

Related reading:
Greece looks for salvation in EM status, FT
Greece really is a submerging market, FT
The new emerging market… Greece, beyondbrics