Korea Wins Temporary Relief After MSCI Delays China Inclusion

Updated on
  • ‘I was worried about a 1 trillion won outflow:’ Midas CEO
  • Kospi falls 0.2 percent; MSCI rules Korea not developed market

South Korea won a reprieve from MSCI Inc.’s decision to keep China’s domestic equities out of its benchmark gauges.

The index compiler rebuffed A shares for a third time on Tuesday, surprising analysts from Goldman Sachs Group Inc. and HSBC Holdings Plc. Adding the stocks would have reduced Seoul’s 15 percent weighting in the MSCI Emerging Markets Index, forcing passive investors to pull cash out of Korea’s market. The Kospi index slid 0.2 percent at the close in Seoul, erasing an earlier gain, as investors weighed MSCI’s China move with a decision not to elevate South Korea to developed-market status.

“It is good news for Korean markets,” said Heo Pil Seok, Chief-Executive Officer at Midas International Asset Management in Seoul. “I was worried about a 1 trillion won ($850 million) outflow but now that worry was resolved.”

The relief may be temporary. MSCI, whose developing-market gauge is tracked by investors with $1.5 trillion in assets, said it will reassess whether to add A shares in 2017, while not ruling out an earlier announcement. China’s inclusion was rejected despite a flurry of measures this year to address MSCI’s concerns, including curbs on arbitrary trading halts and looser restrictions on cross-border capital flows.  

“It is only a matter of time because China is making efforts to improve its capital markets,” said Heo. “Korea will have to think whether it would be good to enter developed markets.”

MSCI said Korea won’t be included on the list for a potential reclassification to developed markets status as part of the 2017 review because recent changes announced by the country’s Financial Services Commission won’t take effect until next year.

“Investment frictions” related to the lack of convertibility of the won and restrictions imposed on the use of stock-exchange data for the creation of financial products remain unaddressed, it said.
South Korea’s stock market has taken a battering amid a slump in the nation’s exports that’s lasted for 17 straight months. Overseas funds have unloaded $8 billion from local equities over the past 12 months. The Kospi index is down almost 10 percent from its April 2015 high.

Foreign investors pulled $470 million from Korean stocks on Nov. 30, the day MSCI added half of the free float-adjusted market capitalization of U.S. listed Chinese shares but not those in Shanghai or Shenzhen.

Opinion is divided on whether a promotion to developed-market status would be good or bad for Korean equities. With a stock-market capitalization of $1.2 trillion, South Korea is one of the bigger emerging nations. But it would be small compared with developed markets like Japan, which has a $4.9 trillion capitalization.

"The uncertainties are resolved and Korea has time to change the situation” to be included in MSCI’s developed index, said Lee Jung Ho, an analyst at Yuanta Securities Korea from Seoul. “Although China’s A-shares could be added eventually, it’s not an issue for investors to worry about immediately."