Greece returns to developed markets after years of crisis

Index provider MSCI has confirmed that Greece will return to its developed markets index in May 2027, marking a key milestone in the country’s long recovery from its sovereign debt crisis.

The decision represents a major step in the Greek economy’s normalisation after the debt crisis, which began in 2009 and led to years of financial instability and international bailouts.

“The majority of participants in the consultation favored the proposed reclassification,” MSCI said.

The move follows a consultation with market participants and will end Greece’s position as the only eurozone country not classified as a developed market within MSCI benchmarks.

“The reclassification will be implemented in one step across all MSCI Indexes, including standard, custom and derived indexes, at the May 2027 Index review,” MSCI said.

“Once reclassified to Developed Markets, Greece will be added to the Developed Europe single market index construction process for determining the MSCI Greece Indexes,” it added.

The upgrade is widely viewed as a symbolic turning point in Greece’s post-crisis recovery, following three bailout programmes worth more than €240 billion, early loan repayments, bank recapitalisations and a return to profitability, alongside the resumption of dividend payments by listed firms.

Greece regained investment-grade status in late 2023 and has since recorded stronger growth than many European peers, although legacy issues such as unresolved non-performing loans continue to weigh on parts of the economy.

At the same time, analysts caution that the transition could reshape the structure of capital flows into the Greek market, creating short-term volatility before longer-term benefits emerge.

Morgan Stanley estimates that the net impact of passive investment flows will be relatively modest, at around $300 million, roughly equivalent to a single day of trading on the Athens exchange.

However, the bank stressed that the underlying process matters more than the headline figure, as the shift from emerging to developed markets will trigger a mass reallocation of capital.

Funds tracking emerging markets are expected to reduce or fully exit Greek positions, while developed market funds will need to build exposure from scratch, creating a time lag between outflows and inflows.

This dynamic implies that Greece’s stock market will first experience liquidity pressure before benefiting from new demand, reflecting the asymmetry between outflows and inflows.

Morgan Stanley estimates that outflows from emerging market passive funds could exceed $2 billion, while inflows from developed market funds may slightly surpass that level, resulting in the net figure of around $300 million.

The adjustment process has already influenced market behaviour, with Greek equities falling about 16 per cent in dollar terms since late February, making them among the weakest performers in the EEMEA region.

This decline reflects not only geopolitical concerns and uncertainty around energy and tourism but also investor repositioning ahead of the index transition.

The current positioning of investors adds further complexity, as emerging market funds are already overweight Greece, increasing the risk of outflows, while only around 12 per cent of developed market long-only funds currently have exposure to Greek equities.

This suggests significant room for future inflows, although these are neither guaranteed nor immediate.

Banks and the Public Power Corporation are expected to be the main beneficiaries of inclusion in developed market indices, attracting the bulk of inflows, albeit at levels equivalent to only a few days of trading activity.

By contrast, stocks that are unlikely to be included in developed market indices, such as Jumbo and Allwyn, face the prospect of sustained outflows without offsetting demand.

Beyond passive flows, analysts emphasise the importance of active investors, noting that many funds tend to retain positions even after a country exits their benchmark.

Early indications suggest that some emerging market investors intend to maintain exposure to Greece through off-benchmark allocations or revised mandates, which could soften the overall impact of outflows.

In this context, the upgrade is increasingly viewed as a strategic shift in investor base rather than a short-term catalyst for market re-rating.

Morgan Stanley maintains that Greece’s investment case remains strong, supported by higher growth rates than the eurozone, solid fiscal performance and favourable prospects for banks driven by fee income and credit expansion.

Combined with the valuation discount relative to European peers, these factors could support further convergence over time.

However, JPMorgan expressed reservations about the reclassification, warning that it could reduce investor attention.

“We are very disappointed that MSCI will move Greece to developed markets from emerging markets at the May 2027 rebalance,” analysts at the bank said.

They noted that the implementation had been delayed from an earlier August 2026 timeline, citing feedback from market participants.

“Some market participants expressed concerns regarding the implementation timeline,” MSCI said.

“While we are not satisfied with the promotion of Greece, given that we expect a decline in investor interest, we are slightly less dissatisfied due to the nine-month delay,” JPMorgan said.

According to the bank, Greece is expected to enter the MSCI Europe index with four stocks, down from eight in the emerging markets index, representing about 0.28 per cent of MSCI Europe.

JPMorgan estimates net outflows of $604 million, with inflows of $108 million into stocks moving to developed markets and outflows of $712 million from those excluded.

“The majority of investors we speak to assume that the transition to developed markets will be accompanied by large inflows,” the bank said.

“However, the transition implies a small inflow for each stock moving into developed markets versus a large outflow for each stock not entering the main index,” it added.

The bank also highlighted the potential impact of Public Power Corporation, noting that if it qualifies for inclusion, total outflows could fall from $604 million to $390 million.

Analysts warned that Greece’s weight in indices will decline sharply, dropping from over 4 per cent in MSCI EMEA emerging markets to below 0.30 per cent in MSCI Europe and just 0.05 per cent in the MSCI World index.

This shift from a country-focused emerging market investor base to a sector-driven developed market framework could reduce visibility and analyst coverage for Greek stocks.

“The goal of index inclusion should be to maximise investor attention,” JPMorgan said.

“Being below 0.40 per cent in MSCI Europe and 0.05 per cent in MSCI developed markets may allow investors to ignore Greece entirely,” it added.

The bank drew parallels with Greece’s previous upgrade in 2001, arguing that investor interest declined significantly at that time.

“We remember when Greece was upgraded to developed markets in 2001, interest in the market fell sharply,” it said.

“We assume the same will happen again,” it added.

JPMorgan also questioned whether Greece could attract more attention than other smaller European markets such as Norway, Austria or Ireland.

“Would Greece attract significantly more attention than Norway, Austria or Ireland,” the bank said.

It noted that its European strategy team had received fewer than five investor inquiries in the past year regarding those markets combined.

Finally, the bank highlighted a divergence in investor sentiment, with some emerging market investors preferring Greece to remain in that category, while developed market investors have shown limited interest.

“We have not yet heard a single developed European market investor express a desire to add Greece to developed market benchmarks,” JPMorgan concluded.