LONDON A switch from developed to emerging market stock indices could rekindle demand for Greek shares, although the crisis-hit euro zone state might sit uncomfortably among the fast-growing economies of Asia and Africa.
Russell Indexes, against whose products some $3.9 trillion of investors' money is benchmarked, cut Greece to 'emerging' from 'developed' status this month, while index compilers MSCI and FTSE are also reviewing the country for relegation.
Explaining the demotion, Russell cited falling incomes in Greece, rising sovereign, financial and currency risks, and a decline in the size and liquidity of its stock market.
That looks like bad news for Greece, which has taken two bailouts from its euro zone peers and restructured its debt to avert an ignominious "Grexit" from the single currency bloc.
But history suggests otherwise.
An upgrade by MSCI 12 years ago actually cost Greece investors because its 0.13 percent share of the developed market index .MIWO00000PUS was far lower than the 5 percent stake it had held in the emerging market equivalent .MSCIEF.
That suggests a reversal could bring in more investors.
"If MSCI downgraded Greece, I would be very happy to look at it," said Maarten-Jan Bakkum, emerging markets strategist at ING Investment Management, which has $2-3 billion under management in emerging equities.
"It's a country that fell into crisis and is now showing signs of recovery."
Russell says Greece's weighting in its emerging market index, while still small, would be more than six times larger than its weighting in the developed index.
Emerging market investors may also be restricted from buying the assets of countries not within their universe, so a change in Greece's status could bring in these risk-hungry funds.
Debt crises, unemployment, wage devaluations and social unrest are a familiar story to those used to investing in emerging markets, whereas developed market investors are still adjusting to this new landscape.
The switch by Russell is largely symbolic, as relatively few emerging market investors use its index, against which around $1.5 billion in funds are benchmarked, according to Lipper data.
Investors say any decision by MSCI to demote Greece would be more significant, as around $80 billion is benchmarked against the MSCI emerging market index.
MSCI is due to make a decision in June, after putting Greece under review for downgrade in June 2012, while FTSE will next give a view in September.
A major economic crisis and default threat knocked 35 percent off Greek shares .ATG in 2010 and another 52 percent in 2011, but stocks rallied 33 percent last year, making them one of 2012's best-performing investments.
Few mainstream investors are looking at Greece despite the price gains, leaving the way open for frontier market specialists such as broker Exotix.
George Zois, head of the Greece and Cyprus desk at Exotix, welcomed Greece as an emerging market.
"Greek stocks have been formally sitting in the developed market space but in fact the market perceives Greece to be more of an emerging market," he said.
"For funds that have an emerging markets mandate, there will be more flow going into Greek equities."
Some Greek indicators, such as unemployment and economic sentiment, have improved this month, although even these tiny green shoots risk being trampled if a bailout deal agreed for neighboring Cyprus this weekend does not ease the crisis there.
For many investors, however, Greece's position in the indices will make little difference.
Its stocks make up less than 0.02 percent of the MSCI world index, against which $1.9 trillion is benchmarked, meaning investors can ignore them if they choose.
One of its most actively traded shares, Coca-Cola Hellenic Bottling (CCH) HLBr.AT, has said it will delist, with a planned switch to the London Stock Exchange expected by July.
That could make a downgrade by MSCI more likely, as market size and liquidity are among the firm's index criteria. But the loss of CCH, which accounts for around 25 percent of the Athens stock market .ATG by market capitalization, could also mean Greece is less heavily weighted even in emerging market indices.
Greece, a relatively wealthy country whose income is falling, rather than a low-income country on the way up, is unlikely to work as a high-growth emerging market play.
And it lacks the demographic dividend of a young population and growing consumer class enjoyed by the emerging markets of the Middle East and Africa.
"Greece is not an emerging markets country, because it is too rich and its financial system is too developed," wrote Jan Dehn, co-head of research at emerging market specialist Ashmore, which has $71 billion under management.
"Greece is simply a bad credit."
(Additional reporting by Angeliki Koutantou and Harry Papachristou in Athens and Joel Dimmock in London; Editing by Catherine Evans)