Greece will be added to the iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) starting November 26, but its economic situation is markedly different from most other developing nations. It doesn’t have a booming population, GDP growth, or valuable natural resources. Instead it offers the possibility of a big recovery after years of decline, but Citi Research analysts Michael Klahr and Maria Gratsova think investors should focus on stock picking.

Greek GDP per capita falls

“[Greece’s] population is 15 percent that of its neighbour Turkey and less than a third of the size of Poland to the west. There is no population growth. GDP per capita has fallen sharply but at $22k is still c.75% higher than Poland’s and more than 50% higher than Russia’s,” write Klahr and Gratsova, adding that “the greatest natural resource currently is the beautiful coastline and islands.” But the GDP has declined by 20 percent in six years, and unemployment has soared. Companies that have survived through cost-cutting measures, deleveraging, and other tactics are in a strong position if the Greek economy takes off in the next few years.

real growth greek v euro

Greek unemployment 1013

Greek real wage grwoth 1013

Gain in Greek equities

Core Eurozone countries have gone to great lengths to prevent Greece exiting the Euro, and while analysts don’t agree if this is the best course for either party, an exit now seems unlikely, making Greek equities less risky in general. But those equities, while still way down from their pre-crash levels, have already gained significantly relative to the ASE Index and no longer look particularly cheap. There certainly isn’t the type of discount an investor would normally expect from emerging markets. “With an uncertain macro backdrop and post-crisis stock market rally, we see Greece as a stock-picking (alpha) rather than a top-down (beta) market,” write Klahr and Gratsova.

Greek stock performance

Greek stocks evaluation

With that in mind, the analysts think investors should use three criteria to evaluate Greek stocks. First, how geared is a company to take advantage of a Greek recovery? The whole idea behind investing in Greece is that a big recovery is around the corner, so stock choices should reflect that point of view. Second, how did the company weather the crisis? There may be years of continuing financial adjustments before real growth kicks in, and it’s important to put money in a company that won’t fold through waste and mismanagement. Finally, is the company poised to take advantage of government restructuring and privatizations? This may be the biggest opportunity in Greece in the next few years, and Greek’s big winners are likely to be involved.