Russell Investments, the indexing firm behind the Russell 2000 small-cap equities index, said it will reclassify Greece as an emerging markets country in June, setting in motion a widely anticipated process in the indexing world given the southern European country’s deep debt-related downturn.
“This conclusion by Russell Indexes results from a three-year market risk review process, as prescribed by Russell’s methodology, in which Greece did not meet macro- and operational risk criteria for developed market status, but did meet classification criteria for inclusion in emerging markets,” Seattle-based Russell said today in a press release.
The company said the change will be implemented at the time of its annual index reclassification in June—a widely watched event in the world of investing in its own right, as additions and deletions of individual companies have led to securities trading patterns aimed at profiting from the process referred to as the “Russell Effect.”
Russell’s move on Greece is likely to be the first of similar moves by other index companies, including MSCI and FTSE. Both have separately put Greece’s status in question for the same reasons Russell did.
The ETF market’s only fund focused on Greece was down 3 percent in early afternoon trade, though the effects the decision is likely to have may be positive for a number of Greek stocks that end up getting purchased by index funds focused on emerging markets.
In any case, the Global X FTSE Greece 20 ETF (NYSEArca: GREK) fell 55 cents to $17.77 a share. Some of those Greek shares likely were caught in a global downdraft related in part to news that China was imposing a 20 percent tax on profits from home sales to help cool a real estate market that is reheating there.
Greece An Example Of A Larger Trend
“It’s a pretty rare event to have a developed country reclassified as emerging—it’s certainly a first for us,” Russell analyst Mat Lystra told IndexUniverse in an interview. “But given current market conditions, Greece may not be the last one either.”
In fact, Portugal is currently undergoing its first of a three-year review cycle, and could come out demoted to emerging market in a couple of years as well, Lystra said.
“Greece isn’t alone in becoming a high risk market,” he said. “This is all part of a larger trend of countries struggling to get their balance sheets back in order since the global crisis of 2008.”
The good news, as Lystra puts it, is that Greece’s ongoing troubles have already caused Russell to trim the country’s weighting in global indexes. In fact, Greece only represents 7 basis points of Russell's developed markets portfolio, meaning any unwinding of positions will have "minimal impact," Lystra said.
The earliest Greece’s status could be reinstated as developed market would be in 2016.
MSCI And FTSE
MSCI has an annual reclassification review in June, and at last year’s review, MSCI said Greece’s developed-market status was under review. It seems quite likely Greece will be reclassified this spring as an emerging market country—a change that would be implemented a year later, in June 2014.
For its part, FTSE too has put Greece’s status as a developed market on the chopping block. Last September, it reaffirmed that Greece was on its “Watch List” for potential changes from “Developed” to “Advanced Emerging.”
Russell’s country classifications are always announced each year in March and implemented in June.
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