12th July 2013
Templeton Emerging markets group executive chairman Mark Mobius has set out just why Greece has been relegated from developed market status to emerging status by MSCI the global index provider.
The veteran emerging markets investor says it is not just based on size of its economy because, for all its troubles, Greece would be well above the necessary level. He adds: “Greece was classified as emerging when I started with the Templeton Emerging Markets Group in 1987, and while the recent news might conjure up images of a significant turn for the worse for the country’s economic fortunes, MSCI’s explanation for Greece’s reclassification was actually more mundane.”
Mobius points out that division of MSCI’s equity universe into separate “developed,” “emerging” and “frontier” indexes was originally conceived in response to the arrival on the world scene of countries in various stages of economic development.
“In order to be classified as a developed market, a country’s gross national income (GNI) per capita has to have been at least 25% higher than the World Bank’s threshold for a country to be in a “high income” (i.e. developed) category for three consecutive years. That would equate to US$15,600, given the World Bank threshold stood at US$12,475 as of 2011, the latest year for which data are available. Despite several years of wrenching recession, Greek per capita GNI has been far in excess of this figure. Indeed, several emerging and frontier markets would meet this criterion.”
Mobius says that the decision is based on other criteria concerning these ease with which investors including passive investors who often follow the MSCI indices can enter and operate in a particular market.
“MSCI has a number of criteria including explicit requirements for market size and liquidity, and somewhat more subjective targets, including a country’s openness to foreign ownership, restrictions on foreign currency trading that might hamper repatriation of funds and availability of mechanisms to facilitate trading.
“Greece has failed both the MSCI size and accessibility tests for inclusion in the developed index because of the Greek stock market collapse since 2007, and the subsequent re-listing elsewhere of some key companies which left the Greek market containing too few large and liquid stocks to allow major investors to take adequate positions.
“In addition, the Greek stock exchange authorities have failed to match developments in other markets in areas such as stock borrowing and lending, short selling and transferability, making the Greek market relatively difficult to do business in.”
Mobius says that his firm sees potential long-term opportunities though it doesn’t mean the emerging and frontier market specialists will be rushing out and buying Greek stocks immediately noting that the group is not constrained by market weightings.
Mobius also notes that South Korea and Taiwan remain under MSCI review for promotion to developed market status but “idiosyncrasies in their foreign exchange markets and stock identification systems worry large investors” so they have failed the accessibility test.
“We feel that the South Korean and Taiwanese economies are so intimately meshed with their emerging neighbours that their presence in emerging market indexes currently makes good sense,” he adds.
Noting that the Persian Gulf states Qatar and the United Arab Emirates to emerging from frontier market status was confirmed while Morocco was reclassified to frontier status, he concludes: “We should again emphasize that these developments are not likely to lead to any major short-term changes to the composition of our emerging and frontier market portfolios. These shifting sands certainly keep things interesting, but the MSCI class switches won’t take effect until 2014, and regardless, making sharp turns isn’t generally our style. Still, we are definitely eager to see more investor attention drawn to these dynamic markets.”