13th June 2013
Greece has been downgraded to emerging market status by the MSCI the largest provider of global indices. The move will see Greece allocated around 0.3 per cent of the overall emerging market index. The last time the country was in the emerging market index, 12 years ago, Greece represented around 5 per cent of total. Of course, in the last 12 years, other emerging markets, the famous BRICs included, have grown dramatically.
Greece has already been downgraded to EM status by Russell. Some experts believe that Portugal could eventually suffer the same fate.
Among other likely impacts, some pension funds may have to sell Greek stocks because their mandates do not allow them to hold securities in anything other than developed markets. There may therefore be a sell off in the short term.
It also means that if you are invested in a passive fund, that is linked to an MSCI index, and you will see the constituents change a little. That is, however, exactly what you are doing when you buy and fund or product linked to an index – you are tracking what the index provider decides constitutes the various indices and in this case the amounts are likely to be small.
EM status may allow more Greek stocks to enter the MSCI indices, due to the more relaxed criteria on offer whereas currently only two companies qualify. It remains to be seen if Greece benefits in the long run from slightly less stringent criteria on a host of fronts. But it’s main economic policies, in terms of debt restructuring and more, will be hugely influenced by what is very definitely a developed market, Germany.
The assumption has been that the EU and Eurozone would shepherd all their member states towards the top status. Now we know that assumption is wrong. Maybe Greece and any other country that follows it, really needs a new category.