Most of us would agree that Greece is not a “developed market” on par with the United States, Canada, or Western Europe. Its instability, pitiful economic governance, corruption and cronyism—all of which contributed to its spectacular sovereign debt crisis—prove that the country is not quite ready for the big leagues.
Morgan Stanley Capital International (“MSCI”), the provider of the indexes that comprise the popular iShares MSCI Emerging Markets ($EEM) and iShares MSCI EAFE ($EFA) ETFs, among many, many others, acknowledged as much last week. The MSCI Greece Index will no longer be classified as a “developed market” and has officially been demoted to “emerging market.”
I’m on board with Greece being declassified as “developed.” But I do take issue with it being reclassified as “emerging.”
“Emerging” implies that the country will eventually emerge. It implies that the country is going somewhere. It implies a young population of upwardly mobile labor and rising living standards. More than anything, it implies a country with a future.
By even the most generous interpretation, does Greece fit this (admittedly subjective) description? Let us consider:
- The median age of Greek citizens is 43 years old. To put that in perspective, the median American is 37 years old and the median Frenchman is 40. Greece has a median age only three years younger than that of Japan (at 46)—which, with its massive population of elderly citizens, is fast becoming the world’s first nursing home nation. Greece also has one of the lowest birth rates in the world. (Source: CIA World Factbook)
- Living standards are falling. By some estimates, the standard of living in Greece will fall by fully 50% before the crisis and the assorted reform programs run their course. By any objective measure, living conditions have deteriorated in Greece and won’t be improving any time soon.
- Even after more than three years of severe economic depression, Greece has a large trade deficit of nearly $17 billion. And unlike most emerging markets, which have large manufacturing and agricultural sectors, services make up 80% of the economy.
Greece is not an emerging market…but you can’t by any stretch of the imagination call it developed either. It’s a country that is stuck in something of a no man’s land: a country that is politically and culturally underdeveloped and unprepared for life as an “adult,” but too old, too urbanized, and with too bleak a future to be “emerging.”
Sadly, the best analogy I can come up with is an elderly person with advanced dementia who has regressed to the mental level of a child.
While it can be tempting to beat up on Greece, I have a legitimate and far more pressing reason for bringing all of this up. When you buy an emerging market mutual fund or ETF, you need to take a look under the hood to see what you are buying.
Let’s revisit the iShares MSCI Emerging Market ETF ($EEM). South Korea and Taiwan together make up a quarter of the ETF’s holdings.
Nothing against South Korea or Taiwan, of course. But both of these countries have living standards close to those of Europe. It’s hard to call these true “emerging” markets because they have already largely emerged. Samsung ($SSNLF), the single largest holding in the fund, is arguably the world leader in smart phones, TVs and home appliances. Great company, but not what I would think of as an “emerging market stock.”
This brings us back to Greece. After the downgrade, will Greek stocks dominate the portfolio of EEM and other emerging market ETFs and funds?
Probably not. And even if they did, that might not be such a bad thing in the short-term. Greek stocks were one of the favored investments in InvestorPlace’ s Best Stocks of 2013 contest.
But my point remains: when you buy an ETF or mutual fund—emerging market or otherwise—you should spend that extra five minutes to visit the fund’s website and see what it owns.
Sizemore Capital has no positions in any security mentioned.
