The British newspaper Telegraph reported today that Russell Investments, an investment house based in the United States, has downgraded its investment rating of Greece to emerging market. The same Investment Company upgraded Greece to mature market during 2001.
This unprecedented decision by the investment house, which according to the British newspaper, manages over 2 trillion dollars in funds, and has 2,400 institutional investors, came as a result of the economic condition that Greece is under, and its huge debt which cannot be managed, or unsustainable.
Before going forward, one question comes to my mind. Did Russell Investments know in 2001, when it upgraded the Greek economy to mature market, that it had debt at the time also? The Greek economy, to my knowledge always borrowed to service its daily government operations, like public pensions, salaries, etc… Why now? Another obvious question, which the analyst also acknowledges, according to the Telegraph, is why did the company not do the same for other nearby economies, such as Portugal? They allege that they do not see the same kind of risk with Portugal when applying the same tests…
The premises under which Russell Investments based its investment downgrading of Greece, are investment tests such as investments and per ca pita income, total market capitalization, and trading volume, which Greece “did not pass”..
According to the Investment Company the above mentioned parameters are vital to a country’s economic viability. It is obvious that after this decision the investment managers who manage a portfolio of funds will reallocate fund allocations of their customers to enhance their wealth.
To me this seems the same game that hedge funds were playing last year with the Greek bond spreads, speculating that Greece will default and will take down with it the …whole euro zone…This sparked a wave of capital to flee the country and the Greek banking system.
Emerging Markets are by definition, developing economies which are experiencing growth and industrialization. So Greece, according to Russell, has not undergone the industrial revolution, but in 2001 it upgraded Greece to mature, so I guess at that time Greece was a mature country.
While I was continuing to refresh my memory of emerging markets, the Greek stock market has already reached the standards of a mature nation, has many publicly traded companies in the Athens Stock Exchange, has very tough regulation by the Hellenic Capital Market Committee, and all listed companies have applied the International Accounting Standards. These are by no means indications that Greece is an Emerging Market. Should we recall how many Greek companies are listed in the New York Stock Exchange?
It is obvious that Investment companies are trying to protect and increase their investors’ wealth. By downgrading Greece to emerging status nation, one foresees portfolio diversification so they are considering Greece as an opportunity. But we must differentiate between portfolio diversification due to investment opportunities and emerging nations….
So Russell is looking for portfolio diversification to its clients because as we know from investments, portfolio allocation is achieved by diversification and when a portfolio has lower correlation with that of other markets. This is the key to a balance between risk and return. This is what portfolio theory is about: if one manages to combine assets with low correlation with each other, then one minimizes risk while maximizes return.
While I was looking further at my notes from College in Emerging Markets I came across some risk factors that investors must consider when investing. One such factor is currency risk. Did the Investment Company, Russell considered that Greece’s currency is the euro? Institutional risk: Did Russell consider that Greece has Accounting Standards; in fact, it uses the International Accounting Standards as well as strong regulatory framework, which prohibits fraud, and investors have adequate disclosure of material information.
As far as liquidity risk, investors have a depth of market liquidity considering that many institutional investors returned to the Athens Stock Exchange when they saw no more blood to draw from the Greek bond spreads... And as far as the political risk, Greece has a coalition government and eight months ago, in a two consecutive election battle, voters preferred the euro zone and to keep the euro as their currency.
