{"id":39061,"date":"2013-06-17T16:09:42","date_gmt":"2013-06-17T20:09:42","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=39061"},"modified":"2013-06-17T16:09:43","modified_gmt":"2013-06-17T20:09:43","slug":"greece-downgraded-to-emerging-market-but-will-it-ever-emerge","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/06\/17\/greece-downgraded-to-emerging-market-but-will-it-ever-emerge\/","title":{"rendered":"Greece Downgraded to \u201cEmerging Market.\u201d But Will It Ever Emerge?"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

Most of us would agree that Greece is not a \u201cdeveloped market\u201d on par with the United States, Canada, or Western Europe.\u00a0 Its instability, pitiful economic governance, corruption and cronyism\u2014all of which contributed to its spectacular sovereign debt crisis\u2014prove that the country is not quite ready for the big leagues.<\/p>\n

Morgan Stanley Capital International (\u201cMSCI\u201d), the provider of the indexes that comprise the popular iShares MSCI Emerging Markets ($<\/span>EEM<\/a>) and\u00a0 iShares MSCI EAFE ($<\/span>EFA<\/a>) <\/b>ETFs, among many, many others, acknowledged as much last week.\u00a0 The MSCI Greece Index will no longer be classified as a \u201cdeveloped market\u201d<\/a> and has officially been demoted to \u201cemerging market.\u201d<\/p>\n

I\u2019m on board with Greece being declassified as \u201cdeveloped.\u201d\u00a0 But I do take issue with it being reclassified as \u201cemerging.\u201d<\/p>\n

\u201cEmerging\u201d implies that the country will eventually emerge.\u00a0 It implies that the country is going <\/i>somewhere.\u00a0 It implies a young population of upwardly mobile labor and rising living standards.\u00a0 More than anything, it implies a country with a future.<\/p>\n

By even the most generous interpretation, does Greece fit this (admittedly subjective) description?\u00a0 Let us consider:<\/p>\n

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  1. The median age of Greek citizens is 43 years old.\u00a0 To put that in perspective, the median American is 37 years old and the median Frenchman is 40.\u00a0 Greece has a median age only three years younger than that of Japan (at 46)\u2014which, with its massive population of elderly citizens, is fast becoming the world\u2019s first nursing home nation.\u00a0 Greece also has one of the lowest birth rates in the world. (Source: CIA World Factbook<\/a>)<\/li>\n
  2. Living standards are falling.\u00a0 By some estimates, the standard of living in Greece will fall by fully 50%<\/a> before the crisis and the assorted reform programs run their course.\u00a0 By any objective measure, living conditions have deteriorated in Greece and won\u2019t be improving any time soon.<\/li>\n
  3. Even after more than three years of severe economic depression, Greece has a large trade deficit of nearly $17 billion<\/a>.\u00a0 And unlike most emerging markets, which have large manufacturing and agricultural sectors, services make up 80% of the economy.<\/li>\n<\/ol>\n

    Greece is not an emerging market\u2026but you can\u2019t by any stretch of the imagination call it developed either.\u00a0 It\u2019s a country that is stuck in something of a no man\u2019s land: a country that is politically and culturally underdeveloped and unprepared for life as an “adult,” but too old, too urbanized, and with too bleak a future to be \u201cemerging.\u201d<\/p>\n

    Sadly, the best analogy I can come up with is an elderly person with advanced dementia who has regressed to the mental level of a child.<\/p>\n

    While it can be tempting to beat up on Greece, I have a legitimate and far more pressing reason for bringing all of this up.\u00a0 When you buy an emerging market mutual fund or ETF, you need to take a look under the hood to see what you are buying.<\/p>\n

    Let\u2019s revisit the iShares MSCI Emerging Market ETF ($<\/span>EEM<\/a>). \u00a0South Korea and Taiwan together make up a quarter of the ETF\u2019s holdings<\/a>.<\/p>\n

    Nothing against South Korea or Taiwan, of course.\u00a0 But both of these countries have living standards close to those of Europe.\u00a0 It\u2019s hard to call these true \u201cemerging\u201d markets because they have already largely emerged.\u00a0 Samsung ($<\/span>SSNLF<\/a>)<\/b>, the single largest holding in the fund, is arguably the world leader in smart phones, TVs and home appliances.\u00a0 Great company, but not what I would think of as an \u201cemerging market stock.\u201d<\/p>\n

    This brings us back to Greece.\u00a0 After the downgrade, will Greek stocks dominate the portfolio of EEM and other emerging market ETFs and funds?<\/p>\n

    Probably not.\u00a0 And even if they did, that might not be such a bad thing in the short-term.\u00a0 Greek stocks were one of the favored investments in InvestorPlace\u2019 s Best Stocks of 2013<\/a><\/strong> contest.<\/p>\n

    But my point remains: when you buy an ETF or mutual fund\u2014emerging market or otherwise\u2014you should spend that extra five minutes to visit the fund\u2019s website and see what it owns.<\/p>\n

    Sizemore Capital has no positions in any security mentioned.<\/p>\n

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