| LONDON, July 10
LONDON, July 10 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
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.
MORE TO CHOOSE FROM
There are only two Greek stocks in MSCI's developed market
index - Hellenic Telecom and state-controlled gambling
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