Thursday, 21 June 2018

Greece and MSCI... back to the EM future?

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The eurozone sovereigns might have spent a lot of ammunition blaming the principal credit ratings agencies, Moody’s, Standard & Poor’s and Fitch, for all their misery but I note that a new culprit has just joined the fray. MSCI, *the global equity index provider, though probably most well known for its emerging market indices, has indicated that it is seriously considering reclassifying eurozone member Greece as an emerging economy.

Anthony Peters, SwissInvest Strategist

(*Correction appended, please see below)

This would be an absolute first – taking a developed economy back into emerging market status – but, according to MSCI, the Greek equity capital markets no longer fulfil the requirements as its national index now only comprises two companies and is “structurally no longer in line with Developed Markets size requirements”.

This would no doubt be a huge blow to eurozone which is trying, in public at least, to treat Greece as something of an errant child rather than as one which has run off with the circus. MSCI points out that the global weighting of Greece in its global equity index has fallen to 0.03%, down from 0.16% where it stood when it was elevated from EM to DM status in 2001.

Recovery for the weaker members of the eurozone must come from their own efforts and not from bankrupting Germany too

It has long been a mild entertainment that the largest company on the Greek exchange is the Coca Cola Hellenic Bottling Company which makes up a quarter of the Athex Composite although I would like to add in its defence that it is a powerful company which operates worldwide.

Perhaps less known is that the second largest – and the other one left in the MSCI Greece Index – is OPAP SA which is, believe me, a bookmaker with a market cap of €1.5bn. This explains the words of Howard Wheeldon on the BBC this morning where he stated quite simply and unequivocally that Greece’s biggest problem is that it does not have the base of an economy which it can grow. The political class which is now happily back in government has catastrophically failed its people.

If Greece is to grow and prosper, it needs to build from scratch and, in my opinion, so long as it is saddled with the euro which renders it uncompetitive before the alarm clock has even gone off in the morning, it will not be able to do so. The concept of the single currency was never wrong. However, when it became a vanity project for the “eurocentrists” and a badge of honour for all nations which aspired to the standard of living of the Germans and the French – in other words everybody – then it lost its moral authority and became a means to an end rather than an end in itself.

Mistakes have been made – mistakes will be made and there is nothing wrong in that – but the pathological desire by the eurocrats to behave as though deep fissures and fault-lines are just wrinkles which can be ironed out without much ado is what is causing a crisis to turn into a disaster.

What concerns me ahead of the impending meeting between Chancellor Merkel and President Hollande is that she seems to be the only one left who is quite clear that Germany is not sitting on the magic bullet which will solve everybody’s problems and restore the life-style of the early noughties. (Incidentally, the original “magic bullet” was in fact a German invention; it was a substance called Salvarsan, was invented by the German chemist and Nobel Prize laureate Paul Ehrlich, and was the first known cure for syphilis.) Now they are all looking to Berlin again but this time for something to deal with fiscally transmitted diseases. Recovery for the weaker members of the eurozone must come from their own efforts and not from bankrupting Germany too.


Meanwhile, Asian markets were broadly weaker this morning as the June HSBC Flash Manufacturing PMI for China reported at 48.1, down from 48.4 in May. As a diffusion index, any number below 50.00 indicates contraction. It has been below 50.00 since well into last year but this is the weakest reading of 2012.

Nevertheless, such sentiment indices must always be taken with a pinch of salt for they reflect, as it says in the name, sentiment. News flow remains poor and Fed Chairman Ben Bernanke’s announcement that it will extend Operation Twist through to the end of the year indicates that, despite all optimistic noises which have been coming out of the US, the Fed remains highly vigilant.

The QE3 gun is loaded but the hammer is not yet cocked. McDonald’s policy prevails while the Fed tries not to take any decisions which might rock the boat in either direction ahead of November’s elections. The FOMC will now probably find itself in lame duck mode until the December 11 meeting.     


(* A previous version of this column referred to MSCI as Morgan Stanley Capital International. Whilst formerly known as Morgan Stanley Capital International, MSCI is now entirely separate from Morgan Stanley, and Morgan Stanley has no ownership interest or other involvement in MSCI’s indices.)

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