JP Morgan: Greece's upgrade to developed market is a trap, not an opportunity

JP Morgan remains firm in its recommendation for Greek stocks, maintaining an overweight position, based on the low multiples of Greek banks and the continuing stability in the country's macroeconomic environment. Greek banks are trading at an 8.6x multiple on fwd PE (for the next 12 months), significantly lower than the European average of 9.4x.

Contradictions and risks

However, JP Morgan expresses doubts about the consequences of Greece's upgrade to a developed market (DM) by MSCI, predicting that this may negatively affect investor interest in Greek stocks. This is because the categorization in emerging markets (EM) maintained investor interest due to the more "developing" nature of these markets. The potential shift of institutional investors to European markets already considered developed, as well as the upgrade of Poland to the same index, may limit capital flows towards Greece. JP Morgan states that similar cases in the past, such as Greece's upgrade in 2001, resulted in a drop in interest in Greek stocks, as investors turned to other European markets.

The role of MSCI

The upgrade of Greece to the MSCI DM index and the move from emerging markets (EM) to developed markets (DM), according to JP Morgan, could lead to small capital flows and limited interest from international institutional investors. MSCI covers about two-thirds of passive capital flows, and the upgrade could cause a focus on more sectoral and pan-European strategies, instead of a target market like the Greek one. JP Morgan reminds that with Greece's move to the MSCI DM, the FTSE Russell index estimates that Greece will experience minimal changes, with limited capital flows and small reallocations in the index's weightings.

Predictions

JP Morgan predicts that the upgrade to a developed market for Greece will not bring the expected benefits that the markets had anticipated, as the move to the DM indices may limit investor interest and cause capital outflows from the country. Despite the high growth of Greek banks and the positive trajectory of the economy, the change in categorization may have consequences for strategic categorization and capital flows, causing a focus on more developed markets in Europe.

The upgrade to a developed market may ultimately reduce Greece's attractiveness as an emerging market and bolster investments in countries with greater uncertainty but higher returns. Although the upgrade is expected to strengthen Greece's position in the European financial sector, the long-term consequences remain uncertain, with investors turning to more sectoral strategies and less to national indices.

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