Greece’s investment-led growth still has some way to go and the sweet spot of its transition from emerging to developed markets (EM-to-DM) in equities still appears to be only about halfway through, a Morgan Stanley report argues.
We are adding Greek banks to the European sector framework, moving them to an Offbenchmark OW position, while in EEMEA we remain OW, preferring banks and domestic companies that benefit from capital expenditure (capex), PPC and Metlen, the analysts write.
The index upgrade trade is maturing and a spring election contest brings the political outlook into focus, they continue.
We forecast real GDP growth of 2.0% in both 2026 and 2027, driven by domestic demand, while investment continues to lead the expansion. Fixed investment has increased by nearly 90% since the end of 2019 and we expect annual growth of around 7% in 2026-27, supported by public investment, European funds and foreign direct investment (FDI).
Listed Greek companies are also increasing their spending, strengthening the outlook for infrastructure, energy and corporate financing.
The FTSE and STOXX reclassifications on 21 September are expected to further support participation by developed market (DM) investors, while the MSCI move in May 2027 remains the most important event for long-only investors.
Participation by developed market investors is increasing from a low base and the feedback we receive from investors in emerging markets suggests that a large part of the existing exposure may remain off benchmark after the reclassification. This makes the transition less a matter of passive flows and more a matter of broadening the investor base.
Previous index transitions suggest that outperformance may be interrupted several months before the implementation of the reclassification, but Greece differs, as it is supported by a strong macroeconomic backdrop.
At the same time, current polls show that a coalition government is a possible election outcome. A coalition led by New Democracy would likely maintain the general continuity of economic policy, but would entail greater uncertainty regarding government formation and the implementation of reforms compared with a single-party government.
We would view any resulting weakness as tactical and not as a break in Greece’s medium-term investment story, the analysts write.
Within the framework of European Equity Strategy, we are adding Greek banks to our sector model and moving them to an Offbenchmark OW position, they continue. Within the framework of EEMEA Equity Strategy, we remain OW on Greece and continue to prefer banks, PPC and Metlen.
Banks, with Alpha Bank as Top Pick, remain the clearest expression of the domestic economic cycle and trade at a discount to their European peers, despite their strong returns and strong balance sheets.
PPC and Metlen offer direct exposure to the investment cycle. By contrast, Greek government bonds appear expensive, with external factors, and especially oil, carrying more weight than domestic politics in the near term.