Russell Indexes recently reclassified Greece from a developed to an emerging market. Despite the label, Greece (GREK) is hardly emerging and will likely continue to regress for the years to come. The only thing the country has in common with other more dynamic emerging markets is its low GDP per capita. Since 2008, Greece's GDP per capita has fallen 30% from $30,800 per year to $21,000 per year. This statistic probably underestimates the degree of poverty created by the country's sovereign debt crisis because of protections made toward government employees softening the fall. Furthermore, a 50% youth unemployment rate is preventing a generation from starting a career in the first place. It has even gotten to the point where families are giving away their children, brothels are sponsoring soccer teams, and the sale of expired food has become legalized.
Does all the gloom and doom festering in Greece signal a bottom in Greek stock prices? The Greek stock market has rallied 72% since June and the valuations are still cheap with the Athens Stock Exchange market cap totaling just 18% of GDP (versus a 25 year average of 40%). There has been a de facto default for a large part of the country's debt and bulls would argue that Mario Draghi has been able to stabilize and contain the European debt crisis and start a recovery.
Unfortunately, the optimism surrounding Europe is little more than hot air. Retail sales, manufacturing PMI's, and GDP across the Eurozone continues to contract while unemployment rates continue to rise. Economic data does not show a bottom for Greece. The other problem is the Greek economy's lack of competitiveness. It's role in the shipping industry has eroded due to foreign competition (mainly Norway and South Korea) and the shift of global trade from the Atlantic to the Pacific. Greece's social welfare system is far too generous in proportion to tax revenues that the private sector can to afford to finance and foreign tourism is not enough alone to support a first world economy (see the Caribbean for an example). Previously, Greece has been able to live beyond its means through historical generosity from larger European powers (EU prior to debt crisis, USA during Cold War, Russia and UK prior to fall of Ottomans to keep Turks in check) or was a province of a larger empire. With the diminishing importance of the East Mediterranean geopolitically and the small size of Greece's economy, foreign allies now have little incentive to subsidize Greek living standards in the future. This means that the Greek economy will slowly decay until the government slashes services and the purchasing power parity of Greeks reflect the lack of value the country adds to the global economy.
What catalysts, then, would symbolize a bottom for Greece? The most likely ones are either the country's exit from the Eurozone (whether voluntary or not) or if the Germans decide to provide transfer payments to Greece in the form of a gift instead of a loan as the Greeks will never be able to pay off their debts without refinancing. A mass devaluation of the Euro to solve the crisis may have the same effect. Until I get one of these catalysts, I am staying away from investing in Greece.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.