New MSCI Additions and Deletions in November... "Implement a Strategy to Maximize Returns"

[Asia Economy Reporter Lee Seon-ae] Attention is focused on the newly added stocks in the November regular revision of the Morgan Stanley Capital International (MSCI) index. When a stock is included in the MSCI Korea Index, passive funds that track the index flow in, causing significant stock price volatility.

According to the securities industry on the 20th, there is a high possibility that L&F, F&F, Iljin Materials, Kakao Games, and Krafton will be included in the MSCI Korea Index during the regular revision.

The MSCI index is a stock price index regularly announced by MSCI, a subsidiary of the global investment bank Morgan Stanley, and most U.S.-based funds use the MSCI index as an operational benchmark. When the MSCI index changes, global passive funds mechanically buy and sell stocks according to this standard. Therefore, if selected as an inclusion stock, a large amount of global capital flows in, acting as a positive factor for the stock price. Conversely, stocks excluded from the index face selling pressure, causing downward pressure on the stock price. The same applies to stocks whose weight within the index is reduced or increased. The announcement date for replacement stocks and the actual rebalancing (index change) date are the 12th and 30th of next month, respectively.

Go Kyung-beom, a researcher at Yuanta Securities, explained, "L&F and F&F showed strong foreign net buying in September, highlighting the MSCI inclusion momentum." He added, "Compared to these two stocks, the supply-demand pre-reflection is insufficient, but the possibility of inclusion for Iljin Materials and Kakao Games is also high." Furthermore, he stated, "The possibility of Krafton's inclusion is presented as 'mid' (Mid). While inclusion seems certain based on market capitalization, some cases of failure to include due to liquidity ratio were considered." Stocks with a high possibility of exclusion include Fila Holdings, Shinsegae, and Daewoo Shipbuilding & Marine Engineering. Next in line with high possibility are Seegene and Cheil Worldwide. Duzon Bizon, BGF Retail, and Lotte Shopping are expected to have a 'mid' possibility of exclusion.

Kang Song-cheol, a researcher at Eugene Investment & Securities, predicted, "We expect the inclusion of five stocks: Kakao Games, Krafton, L&F, F&F, and Iljin Materials." However, he forecasted, "The likelihood of Krafton, L&F, and F&F being included is higher than that of Kakao Games and Iljin Materials." He also anticipated that Daewoo Shipbuilding & Marine Engineering, Lotte Shopping, CJ Logistics, BGF Retail, and CJ will be excluded.

Experts recommend a strategy of buying newly included stocks on the day the regular review is announced and selling them on the day the index is applied to realize profits. This investment strategy considers that stock prices rise due to inclusion expectations but the positive factors disappear after the rebalancing is implemented. According to Shinhan Investment Corp., the absolute return of the strategy of buying on the review announcement day and selling on the change day averaged 6.5% since 2015.

For aggressive investors, there is also a method of purchasing candidate stocks expected to be included in the MSCI index or to have their weight increased within the index one month before the index change. This allows investors to secure stocks at a lower price before demand concentrates on inclusion stocks. However, if inclusion fails unexpectedly, disappointment selling may occur. Kang Song-cheol of Eugene Investment & Securities explained, "Since 2020, excess returns compared to the market have been higher in the period of anticipating inclusion stocks and buying them in advance than after the announcement of replacement stocks." He added, "In the case of the MSCI index regular revision, the period one month before the replacement stock announcement showed the greatest expected excess returns."

Meanwhile, looking at the stocks excluded or included in this year's MSCI Korea Index, three stocks including HMM, SKC, HYBE, and Green Cross were newly included in the May semi-annual review, while seven stocks including Hyundai Marine & Fire Insurance, Hanwha, Lotte Holdings, GS Retail, Samsung Card, Ottogi, and Korea Gas Corporation were excluded. In the August quarterly review, three stocks including SK IE Technology, SK Bioscience, and EcoPro BM were added, while KMH was removed.