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Index maker passes a harsh judgment on Greece

Read David Berman's commentary at Inside the Market at

If you're interested in the spectacular growth opportunities of emerging markets, say hello to your newest investment prospect: Greece.

You read that right. Russell Investments has decided to turf Greece out of its developed-market indexes and send it to the emerging markets group - the latest in a series of humiliations for the economically savaged country and a never-seen-before move for the index provider.

Most index-tinkering results in moving countries up the ladder. The last time Russell modified its developed-market index, in 2001, Greece, Portugal and Israel were promoted.

Now, Greece's economic and operational challenges make it too risky for inclusion with the likes of Canada, the U.K. and the United States. And Russell sees little chance of a big improvement any time soon.

"Greece has failed our standards for developed markets over the past three consecutive years, which prompted the change to emerging status," said Mat Lystra, senior research analyst at Russell Global Indexes.

By comparison, Portugal has failed the standards for just one year, providing some context to the depth of Greece's economic despair as the euro zone continues to struggle with its sovereign debt crisis, recession and double-digit unemployment.

The shift has implications for investors who use exchange-traded funds, or baskets of stocks that track indexes: Greek stocks will account for about 4.4 per cent of Russell's emerging-markets index, giving you instant exposure.

That puts the country in the bottom third of the index and gives it slightly more than a quarter the size of China's weighting. But it's enough to make you wonder if Greece should be a part of your portfolio.

After all, emerging markets tend to have a reputation as vibrant economies that are vulnerable to setbacks but also tend to deliver big growth.

By comparison, Greece's economy contracted 6 per cent in the fourth quarter, year-over-year, marking its 18th straight quarterly contraction. And the Athens Stock Exchange general index is down more than 80 per cent since 2007, despite a rally that began midway through 2012.

Naturally, you might wonder why Russell would foist Greece upon unsuspecting emerging market investors, who had probably signed up for exposure to superstar economies such as China, India and Brazil.

"Certainly, that is a question that we had anticipated," Mr. Lystra said, noting that the purpose of the index is to reflect the contemporary market.

Besides, while Greece is riskier, it's not "uninvestable."

"That's where we, as an index provider, need to say that Greece is still deserving of some place in the global investing landscape," he said.

Maybe there's even some reason to feel upbeat about Greece's demotion to emerging markets status, at least from a contrarian perspective.

If the best time to invest is when all the bad news has been built in, this demotion adds to the impression that things can't get a whole lot worse for the country.

And with Greek stocks rebounding more than 100 per cent since June - albeit from a very low level - there is reason to believe that Greece could even take to its new status.

You can say this for it: Expectations are low.

© 2007 The Globe and Mail. All rights reserved.

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