Greek stock switch to emerging market status may have silver lining

LONDON, July 10 Wed Jul 10, 2013 9:23am EDT

LONDON, July 10 (Reuters) - Twice-bailed-out Greece may not relish its impending switch to the world of emerging markets, but the move should bring with it new risk-seeking investors.

Index compiler MSCI said last month it would downgrade Greece to emerging market status from November, citing weak market access and the small number of Greek stocks that met the criteria for inclusion as a developed market.

MSCI this week issued a provisional list of Greek stocks that will enter its global emerging markets index in November following the downgrade.

The troubled euro zone country may not welcome the demotion, which comes as developing markets suffer from their own growth and earnings pressures.

But emerging market investors are now likely to show more interest in it.

"Greece will come back on radar screens - for eastern European funds, it becomes part of the mandate," said Julian Mayo, co-chief investment officer at Charlemagne Capital.

"It shifted from being a tiny part of one universe to a slightly less tiny part of another universe."

Mainstream investors' interest in Greece has dwindled following the country's bailouts and a debt restructuring, and the Athens stock index hit a 2013 low last week.

Compiler Russell Indexes also demoted Greece to emerging market status earlier this year, but analysts say the MSCI indices are more closely watched and their move will have far more impact.

Around $1.9 trillion is benchmarked against MSCI's developed market index - MSCI World. But Greece's current 0.01 percent weighting in that index is so tiny that it is easy for investors to ignore it altogether.

While Greece will still only have a 0.3 percent weighting in the global emerging markets index benchmarked by $1.3 trillion in investments, within indices of central and eastern European stocks, market participants say it is likely to have a more substantial 2-4 percent weighting.

Mutual funds in the emerging markets Europe equity category hold a combined $17.2 billion, according to Lipper data, and all of them may start buying Greek stocks.

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There are only two Greek stocks in MSCI's developed market index - Hellenic Telecom and state-controlled gambling monopoly OPAP.

But it will include more when it moves the country to its emerging market index, which has less stringent rules on market capitalisation, liquidity and market access.

MSCI's provisional new Greece index contains eight stocks, including National Bank of Greece, Alpha Bank and power utility PPC.

Greek banks have been active in southeastern Europe in recent years, making them familiar to those focusing on the region. Veteran investors may also have traded stocks in Greece when it was last an emerging market, 12 years ago.

"In the broker community, people have got very excited about Greece," said Maarten-Jan Bakkum, emerging markets strategist at ING Investment Management. "The older people remember it."

Due to the bailouts and restructuring, Greece has been looking more and more like an old-style emerging market.

Analysts say the lack of a strong institutional framework makes it reminiscent of other emerging markets in the past, such as South Africa.

Although it will be the only euro zone member in the MSCI emerging market index, the new ranking is not that unusual. Two euro zone countries - Estonia and Slovenia - are in the MSCI index of frontier, or less-developed, stocks.

Greece has been hitting the headlines again. Euro zone finance ministers this week agreed to disburse a further 6.8 billion euros in aid for the country, but only in installments as Athens remains under watch from the region and the IMF to ensure it implements unpopular reforms.

The country is wading through its sixth year of recession and unemployment stands at nearly 27 percent, so the constant negative headlines may unnerve even investors in riskier emerging market assets.

"I'm not really tempted," said Gary Greenberg, head of emerging markets at Hermes Fund Managers.

"There could be some very mouth-watering opportunities but the trouble is they are locked into the euro and the euro zone, so how is the economy ever going to get going?"

Greek stocks hit 2013 lows last week and have fallen nearly 10 percent this year, after rebounding by 33 percent last year. The MSCI emerging Europe index, however, has dropped a larger 18 percent this year.

Valuations of 8.6 times earnings for Greek stocks are cheap, compared with valuations of nearly 10 times earnings for the MSCI emerging market index.

While the news for emerging markets has been poor this year, with the IMF citing their slowdown this week as it downgraded its global growth forecast, Greece is starting to see a few chinks of light.

Like many emerging markets of a few years ago, its economy could begin to pick up from its current low base, making it an attractive investment proposition.

As Morgan Stanley analysts said in a note:

"Greece's medium-term economic story...is one where its many structural imbalances keep correcting - and faster than many have thought."

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