Greece Is Demoted as MSCI Shuffles Its Indexes

A Greek national flag flies outside the Hellenic stock exchange in Athens, Greece Photograph by Chris Ratcliffe/Bloomberg

Insult to injury for bailed-out Greece: On Tuesday it became the first developed market to be cut to emerging-market status by MSCI, which has $7 trillion in investor assets tracking its equity indexes. The move reverses a 2001 upgrade to developed status. The Athens ASE Index is down more than 80 percent since 2007.

At the same time, MSCI raised Qatar and the United Arab Emirates to emerging markets (PDF), while Morocco was downgraded to a frontier market. The index keeper maintained South Korea and Taiwan as emerging markets, and placed Chinese shares traded on local exchanges on review for emerging-market inclusion.

MSCI put Greece under review for downgrade a year ago, saying its restrictions on in-kind transfers, off-exchange transactions, stock lending, and short selling no longer represented a fully functional market. According to Bloomberg data, Greek companies now represent just 0.01 percent of the MSCI World Index, compared with 0.16 percent three years ago. In March, Russell Investments said it was downgrading Greece to an emerging market from a developed one.

Constantinos Zouzoulas, an analyst at Axia Ventures Group, wrote in a note that while it’s not clear what weighting Greece will have in the emerging-markets index, it’s certain to be larger than its weight in the developed-markets index. “This could be positive news for the Greek market as it could attract more interest, although there could be pressure in the short term,” he wrote.

The news is better for Qatar and the U.A.E, which according to a May 31 report by HSBC could draw investment of more than $430 million and $370 million, respectively, thanks to their upgrades.

As for Morocco, MSCI blamed a failure to meet minimum liquidity levels in downgrading the North African country to a frontier market; it was added to the emerging-markets index in 2001 and presently has the smallest weighting in the benchmark. MSCI added that a shortage of foreign currency in Egypt could “trigger a review for potential reclassification to frontier markets.”

MSCI also credited positive regulatory momentum in China for its initiation of a review of China A shares for inclusion in the emerging-market index. South Korea, which many already consider a developed market, remains on review for that MSCI designation; Taiwan’s market will also have to wait to graduate to that status.

Elsewhere, MSCI decided to not include Israel in its Europe Index.

Frontier markets have outperformed in the recent selloff. According to a piece by Michael Patterson and Weiyi Lim, the world’s least-developed markets are proving the most resilient in a three-week global pullback that wiped out $1.9 trillion of equity value. Since May 22, when U.S. Federal Reserve tapering jitters began, 13 of the 15 top-performing stock markets have been in frontier countries.

“There are some countries and sectors that are more insulated than others,” said Jonathan Binder, chief investment officer at Consilium Investment Management. “A cement producer in Pakistan really is not that correlated in economic terms to what the Fed is doing.”

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