Economic Crisis

The latest act in the Greek economic tragedy

As the latest act in the Greek economic tragedy, Greece was downgraded to an emerging market this week. This is a stark reminder that the economic world is split into two parts. On the one hand, there are the higher growth, lower debt emerging markets. On the other hand, there are the developed economies, or as we prefer to call them at OfWealth the “submerging markets”. These have excessively high debts and, unsurprisingly, low growth.

Specifically, MSCI Inc, a provider of all sorts of global stock (share) indices, downgraded Greece from developed market to emerging market status, according to a story from Bloomberg.

(At the same time Qatar and the United Arab Emirates were raised from frontier market status to emerging markets, and Morocco was relegated to the frontier market world. “Frontier markets” are a disparate group of “everything else” that doesn’t make the emerging market cut.)

MSCI’s categorisation of stock markets between developed, emerging and frontier status can seem a little arbitrary at times. South Korea and Taiwan remain as emerging markets despite their relatively high average incomes, world class manufacturing and technologically advanced conditions.

The specific reasons (or excuses?) for Greece’s downgrade are too boring and technical to repeat here. Stuff to do with the day-to-day functioning of certain aspects of the local capital markets. But the fact that it has happened sends an important message. Countries that were previously assumed to be developed, rich, sophisticated can no longer be assumed to stay that way.

…the eurozone, that dysfunctional collection of disparate economies and cultures, all bound together by a politically motivated currency experiment.

Remember, Greece is a part of the eurozone, that dysfunctional collection of disparate economies and cultures, all bound together by a politically motivated currency experiment.

So now it’s official – at least according to MSCI. Germany – that most advanced of industrial and technological powerhouses – now shares its currency with an emerging market, namely Greece.

The latest act in the Greek economic tragedy

I pity Greece and the Greeks in some ways. They’re no more or less guilty of mismanaging their country than the peoples and governments of a great many other countries. These include the USA, through Ireland, the United Kingdom, France, via Spain, Portugal, Italy, Japan to name just a few. All of these countries, and more, have squandered their wealth, overborrowed, and will lay the burden on their children and granchildren.

But the Greeks’ own problem is that Greece is small. That makes it, and its people, expendable.

…high rate of youth unemployment, which is over 60%. That is a social disaster, and a sure sign of a full blown depression in my book.

First are the unelected European bureaucrats that demand unrealistic austerity measures to protect the euro project and French and German banks in the short term (and the creation of a federal European superstate in the long term). This results in things like the shockingly high rate of youth unemployment, which is over 60%. That is a social disaster, and a sure sign of a full blown depression in my book.

Then US organisations like MSCI can just tip Greece out of the developed market club, meaning capital will be pulled from Greek stocks the next time index funds are re-balanced.

The Greeks may have their problems, but this just serves to remind us of where the opportunities lie. Namely elsewhere – outside of the submerging “rich” countries.

Consider this. According to the Financial Times, in the five year period 1982 to 1987 just 31% of world economic growth came from emerging economies, and 69% came from “advanced” economies. By the period 2002 to 2007 this position had completely reversed, with 67% of growth coming from emerging economies and 33% from the old, tired, bust countries. Projections for the period 2012 to 2017 make it a 74% to 26% split.

Sources of world economic growth

Sources of economic growth graphs
Sources of economic growth are changing. This is why our eyes should look to these new markets when investing.

If you have a pension fund or other long term investments then emerging market stocks must be a core part of your investment strategy. In fact the longer the investment horizon the higher your allocation should be. Prices may jump around from time to time, but it’s the long term result that counts.

The Greek economic tragedy serves to hold a mirror up to what is going on in the world, even if the country is small. Old powers are failing and new economic forces are increasingly dominating world trade and commerce. This is a giant long term trend gliding past the day to day noise of government meddling and talking TV heads. If you want to avoid your own tragedy you should invest accordingly.

Until next time OfWealthers,

Rob Marstrand

Normal service from OfWealth will now be resumed. Last week our small team was variously sheltering from four day rain storms in a Mexican hotel, dealing with knee infections in New York, having meetings with fund managers, gold experts and art dealers in London, and passing through Paris on the way to an investment conference at a secret location in the French countryside. Now, back at our base in South America, we can concentrate on bringing you more thoughts.

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.