Should We Target November MSCI and December KOSPI200 Inclusion Stocks?

[Asia Economy Reporter Oh Ju-yeon] As the year-end approaches, the period for the replacement of stocks included in major indices has arrived. This month, there is the Morgan Stanley Capital International (MSCI) November semi-annual review, and in December, the regular changes to the KOSPI 200 and KOSDAQ 150 indices are scheduled. Market interest is growing in the newly added and removed stocks.

According to the financial investment industry on the 4th, the results of the MSCI stock index semi-annual review (changes) for newly included stocks will be announced on the 11th, Korea time. Since the strategy of buying on the review day and selling on the change day has yielded high expected returns, attention is focused on the replacement stocks.

Stocks mentioned for new inclusion include SK Biopharm, SK Chemical, and Doosan Heavy Industries & Construction.

Shinhan Financial Investment predicted that considering market capitalization until the end of October, SK Biopharm and SK Chemical have a high possibility of being newly included in the MSCI index. It estimated passive buying demand of 120 billion KRW for SK Biopharm and 170 billion KRW for SK Chemical due to index inclusion.

Researcher Kang Song-cheol said, "For reference, foreigners have net purchased 77 billion KRW of SK Biopharm and 28 billion KRW of SK Chemical respectively in October," adding, "Additional buying inflows are possible."

However, regarding Doosan Heavy Industries & Construction, he assessed, "The possibility of index inclusion is moderate as its market capitalization falls short of the hurdle market capitalization required for inclusion."

Stocks likely to be removed include POSCO International, Ottogi, BNK Financial Group, and Lotte Holdings.

Samsung Securities forecast that the number of additional stocks such as SK Biopharm and SK Chemical will be around 2 to 3, and the number of removed stocks will be about 4. They explained that there are cases of deletion due to failure to meet the free-float market capitalization criteria, so the number of removed stocks will exceed the number of added stocks.

Researcher Kim Dong-young said, "In this year’s case, the ban on short selling since March has maximized the index rebalancing effect (sharp price rises of additional stocks)," adding, "A representative example is the overall sharp rise in the stock price of additional stocks like Shinpung Pharmaceutical during the MSCI regular reviews in May and August."

He added, "The period until the resumption of short selling in March next year is a good opportunity to seek alpha through such event-driven strategies," recommending "quick position entry for SK Biopharm, SK Chemical, POSCO International, Ottogi, and BNK Financial Group, which are certain to be added or removed."

In December, there will also be regular changes to the KOSPI 200 and KOSDAQ 150 indices. The change results will be announced this month, and rebalancing will take place on December 11.

According to Kiwoom Securities, the strategy of buying expected KOSPI 200 inclusion stocks one month before the announcement date and selling on the announcement date has outperformed the market return in all regular KOSPI 200 changes over the past four years.

Kiwoom Securities suggested Shinpung Pharmaceutical, CS Wind, Daewoong, Zinus, Samyang Foods, and Namsun Aluminum as stocks expected to be included in the KOSPI 200 regular changes.

For the KOSDAQ 150, they mentioned Kakao Games, MedPacto, Soulbrain, Vinex, RSUPPORT, SNS Tech, Seoul Viosys, JNTC, Daewoo Electronics Materials, Nanos, Lemon, Dongkuk S&C, PNT, Korea Investors Service, CIS, Novarex, L&C Bio, and Korea Center.

Choi Jae-won, a researcher at Kiwoom Securities, said, "Market interest will focus on the top KOSPI 200 stocks with strong capital inflows," explaining, "Considering pension fund passive money and exchange-traded fund (ETF) tracking money, demand effects for Zinus and Samyang Foods in the KOSPI 200, and for Nanos, Korea Investors Service, and Novarex in the KOSDAQ 150 are expected to be relatively strong, and the benefits for the top KOSPI 200 stocks are likely to be relatively strong." He added, "Interest in the rebalancing event is increasing, and the excess returns of this strategy have recently been growing."