The asset manager, which says it has around $163 billion in assets under management and offers portfolio management and investment advice to investors, announced that starting from June Greece will be classified as an emerging market rather than a developed one in its Russell Indexes.
“Our analysis of Greece and conclusion to reclassify its market status has been guided by the rules-based, objective and transparent methodology for Russell Global Indexes,” Mat Lystra, senior research analyst for Russell Indexes, said in a statement.
In an insight into the move written in February, Lystra said that Greece, which Russell designated as a developed market back in 2001, had been on a path towards being reclassified as an emerging market since 2010, having failed the asset manager’s operational and macro risk parts of the review over the past two years.
“During our 2013 global market risk reviews, when we again evaluated the two risk profiles, Greece failed both tests,” Lystra wrote.
“We believe a country that has become systematically riskier, while remaining capable of economic rebound, is more appropriately categorized as an emerging market.”
One of the indicators that Russell looked at was gross national income per capita and although Greece’s GNI per capita has been traditionally lower than most other developed markets’, “over the last decade it has generally tracked to the developed-markets average.”
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But since 2009, Greek GNI per capita has declined while the median developed-market GNI per capita has continued to increase, he said.
“Greece’s divergence from its developed-markets peers is an indication that the country has become more risky,” Lystra wrote.
Another indicator that was taken into consideration was the EIU Country Risk Score – a composite measure averaging sovereign, financial sector and currency risks. An EIU score of 55 or greater for a developed or emerging country “results in that country’s failing the macro risk portion of Russell’s review.” In 2011, Greece’s score was 64 and last year it was 66.
Another gauge of a country’s development is total market capitalization, and in Greece it is smaller than the median market cap in emerging markets, as it has lost nearly 85% of its value since 2007.
“The decline in market cap to current levels suggests that the Greek market has become more risky than those of its developed-market peers,” Lystra said.
Liquidity also matters, and in 2012 in Greece it declined to more than half of the 2010 level.
“Greece’s current liquidity suggests a higher operational risk profile, more in line with emerging-market countries,” Lystra said.
He added that data from the Athens Stock Exchange showed average daily volumes for last year as being less than those in 1997.
Greece may not be the only one to be downgraded, as “many developed-market economies have been under significant stress in recent years,” Lystra said.
“Conversely, some emerging and even frontier markets may set examples of stability and standardization such that they become developed markets,” he added.
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