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Will Korea succeed in campaign to upgrade MSCI market status?

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Inclusion in MSCI Developed Markets Indexes to dispel 'Korea discount'

By Anna J. Park

The government is making a fourth attempt to campaign for Korea's stock markets to be included in MSCI's Developed Markets Indexes. The indexes are available in various indices, and one of the most representative is the MSCI World Index, which represents the performance of stock markets in 23 countries. Three Asian countries ― Japan, Hong Kong and Singapore ― are included in the index, while various North American and European countries are also represented. MSCI classifies countries' stock markets into three categories: developed, emerging and frontier markets.

The government made three attempts previously ― in 2008, 2015 and 2019 ― to change its country status in the index, only to fail. Since Korea was first categorized as an emerging market in 1992, the country is still represented in the MSCI Emerging Markets Index along with 26 other countries. It is a contrast given that Korea was promoted to a developed market in the Dow Jones, S&P and FTSE indices back in 1999, 2008 and 2009, respectively.

Market experts have stressed that once Korea succeeds at being included in MSCI's Developed Markets Indexes, its stock markets will enjoy a huge influx of global passive money, up to 61 trillion won ($51 billion). According to the Korea Economic Research Institute's study, the KOSPI index could rise as high as 4,035 points once that much foreign investment enters the local equity markets. The local equity markets are also estimated to increase by 14.2 percent.

"If the country's equity markets are added to the MSCI Developed Markets Indexes, the local stock markets will be stabilized, as stable long-term investment money from global institutional investors, such as global pension funds and insurance firms, will enter into Korea's stock market," said Park So-yeon, a researcher at Shinyoung Securities.

Market analysts also point out that remaining in the MSCI emerging markets category will ultimately undermine the value of listed companies on domestic stock markets, as it is harder for these listed firms to receive enough funding from stable global investors.

That's why the government has been pushing forward with its efforts to upgrade the country's market status with the MSCI, so that local companies and domestic stock markets can dispel the so-called "Korea discount," the tendency of Korean company stocks to be undervalued compared to firms' actual earnings and performances.

Gov't positively reviews 24-hour offshore currency market

It's been said that MSCI looks into three main criteria when deciding on the market status upgrade, namely: economic size, stock market size and market accessibility.

In terms of the first two standards ― such as the country's GDP level, which is around the world's 10th highest, as well as the market cap of Korean stock markets ― local equity markets seem able to pass the MSCI's bar, experts say. At the end of 2020, the Korean stock markets' market cap was the world's 13th highest, while the amount of transactions was ranked fourth. These figures seem quite enough to break down the door that's currently open for only 23 countries.

One remaining issue is market accessibility. During the past few years, MSCI has asked the government to open a 24-hour offshore currency market and ease regulations on the registration of overseas investors, as a precondition for changing its market status. As a country that was hit hard by the Asian financial crisis of the late 1990s, the Korean government has taken a cautious approach regarding offshore currency markets. The government's refusal in this matter was ascribed as one of key reasons behind the country's failure to make it into the developed markets category.

However, the government seems to have finally changed its position on the matter. Deputy Prime Minister and Finance Minister Hong Nam-ki said in mid-December that the government will positively review the possibility of launching the 24-hour offshore currency market.

"As the government aims to push forward with inclusion in MSCI's developed market category, the government needs to positively review the opening up of the 24-hour offshore currency market," Hong said during a press conference last month.

Along with the consideration, the government plans to revise the country's Foreign Exchange Transactions Act for the first time since 1999.

Another market accessibility issue is short-selling. Short-selling has been only partially allowed in both the KOSPI and Kosdaq markets since March 2020, but it needs to be fully allowed in order for the Korean equity market to earn developed market status from the U.S. index provider.

The finance ministry plans to announce a set of related measures on the MSCI market status upgrade by the end of January or early February. The finance ministry conducted a global survey late last year on dozens of world-class institutional investors, including Vanguard, Black Rock and T.Rowe Price, who are also major shareholders of MSCI, to listen to their opinions on the matter. The government is currently analyzing the survey results to reflect them in its measures.

Aiming for MSCI watchlist first

Despite the government's ongoing campaign to accomplish its long-held vision, it is still uncertain whether Korea's fourth attempt will bear fruit this time around. That's because Korea first needs to make itself onto MSCI's watchlist to be considered a candidate for the market status change.

MSCI plans to announce its latest watchlist in June, after collecting market participants' opinions. Even if Korea makes the list this time, at least a year has to pass before a decision is made on the country's inclusion, and another year has to pass to be actually included in the index. This process means that Korea's inclusion in the developed markets index could be sometime around 2024 at the earliest.



Park Ji-won annajpark@koreatimes.co.kr


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