June 16 (Bloomberg) -- Israel was raised to developed- market status at MSCI Inc., whose stock indexes are tracked by investors with about $3 trillion in assets. South Korea, also under review for an upgrade, remained an emerging market.

Israel, with a stock market valued at more than $131 billion, was the 14th-biggest nation classified as an emerging economy by the New York-based firm, according to data compiled by Bloomberg. Korea will be evaluated for the developed-markets designation again in 2010, MSCI said.

The TA-25 Index of Tel Aviv shares has surged 31 percent this year, which would make it the second-best performing developed market after Norway. Israeli technology and chemical companies may attract increased investment, according to Michael Wang, London-based strategist at Morgan Stanley.

“We finally broke the glass ceiling,” Tel Aviv Stock Exchange Chief Executive Officer Ester Levanon said. “We’re playing with the big boys now.”

The benchmark TA-25 index rose 0.7 percent to 857.45 at the close. Israel’s Finance Minister Yuval Steinitz called the new status “a badge honor.” The upgrade “requires that we continue to protect, improve and develop the Israeli economy,” he said at a press conference in Jerusalem.

Israel will shift in 2010. MSCI also said it will consider making Taiwan a developed market. The firm announced that the United Arab Emirates, Qatar and Kuwait will remain frontier markets.

Markets Rally

The MSCI Emerging Markets Index of 22 developing nations has climbed 35 percent this year as oil and metals prices rallied on signs the worst of the global recession is over, boosting the outlook for commodity producers. The MSCI World Index of 23 developed countries has climbed 5.5 percent, while the MSCI Frontier Markets Index that includes companies from 25 nations gained 14 percent.

Israel will make up 0.39 percent of the MSCI World, compared with 2.87 percent in the MSCI EM index, according to Bank of America Corp. and Bloomberg data.

UBS AG and Mizrahi Tefahot Bank Ltd. said the new classification will be negative in the short term for stocks as emerging-market investors who are barred from owning equities in developed countries sell holdings to reflect Israel’s new status.

Reshuffling Assets

“Investors are selling equities in Israel as they anticipate this reshuffling of assets,” said Doron Levi, head of the dealing room at Mizrahi, Israel’s fourth-largest bank.

Inflows will pick up after May 2010 when the implementation starts officially, Daniel Rapoport, the head of trading at Excellence Nessuah Investments Ltd. in Ramat Gan, Israel, wrote in an e-mail following MSCI’s announcement.

Valuations on the TA-25 have more than doubled since the fourth quarter. Using the prior 12 months of operating profit, the price-to-earnings ratio for the TA-25 has jumped to 25 from 9.6 in November. Israel’s economy is forecast to expand 0.3 percent in 2010, after shrinking 1.7 percent this year, the International Monetary Fund said in its April World Economic Outlook report.

Becoming a developed market “opens countries to a broader universe of potential investors,” said Marc Tommasi, the Fairport, New York-based managing director of global strategies at Manning & Napier Advisors, which oversees $3.6 billion of equities outside the U.S.

‘Accessibility’

South Korea wasn’t classified as a developed market because its currency isn’t fully convertible and its stock market’s real-time data didn’t meet the requirement for the change, MSCI said.

“Investors have continued to highlight some significant accessibility issues for Korea which are not characteristic of developed markets,” MSCI said.

The benchmark Kospi index fell for a second day, declining 0.9 percent to 1,399.15. The measure has risen 24 percent this year.

“The South Korean stock market wasn’t interested in the MSCI upgrade, so I don’t think it will negatively affect the market,” said Lee Jin Woo, a fund manager at Seoul-based KTB Asset Management Co., which manages $9 billion in assets. “Global money is likely to focus on emerging economies, which will recover faster than developed markets. I cannot see many benefits from the upgrade under the current situation.”

Greece, which became a developed market in 2001, was the last nation to win that designation at MSCI. The benchmark FTSE/ASE 20 Index of the country’s biggest companies has climbed 24 percent this year.

To contact the reporter on this story: Tal Barak Harif in Tel Aviv at tbarak@bloomberg.net.

Last Updated: June 16, 2009 11:37 EDT