[Initial Insight] A Consideration on Inclusion in the MSCI Developed Markets Index

[Asia Economy Reporter Hwang Junho] The era of 55 million active stock trading accounts has arrived. This means that over the past six months, there have been as many as 55 million stock accounts with transactions involving more than 100,000 KRW. This far exceeds South Korea's total population of 51 million, marking a shift to an era where one person holds two accounts.

As interest in stocks grows, political attention has also increased. The ruling and opposition parties' debates over short selling and related issues such as MSCI (Morgan Stanley Capital International) inclusion in the developed markets index have captured the attention of the stock population.

To summarize the controversy over short selling, Lee Jae-myung, the Democratic Party presidential candidate, supports a full resumption of short selling, arguing that it is necessary for MSCI developed market index inclusion. On the other hand, Yoon Seok-yeol, the People Power Party candidate, only sympathizes with the view that the short selling market is a tilted playing field between individuals and institutions, without taking a clear stance. Meanwhile, Hong Joon-pyo, who has dropped out, advocated for abolishing short selling, so similar policies are likely to appear in future manifestos.

The ruling party's position, which presents logical arguments and alternatives, seems quite persuasive. However, the opposition's stance aligns more closely with the angry retail investors who claim the stock market is shaken by the impact of short selling. Yet, the opposition's position does not conform to global standards. Short selling, which exists in similar countries, being abolished solely in South Korea under government initiative could pose a market control risk. Foreign investors, who are major players in the domestic stock market, are sensitive to such attitudes. This would remove reasons for them to view the Korean stock market favorably.

The benefits of inclusion in the developed market index, offered by the ruling party as a carrot for fully resuming short selling, also appear substantial. The Korea Economic Research Institute estimates that upon inclusion in the developed market index, between 17.8 trillion and 61.1 trillion KRW of the 3.5 trillion to 12 trillion USD in tracking funds could flow into the domestic stock market. Based on the KOSPI, this implies a potential increase of about 8 to 27% compared to current levels. It also expects a significant reduction in market volatility.

However, the catch is that inclusion in the developed market index, which seems like a bait product, is not easy. Resuming short selling alone will not suffice. It is necessary to allow a 24-hour offshore KRW trading market, relax the foreign investor registration system, and improve the unpredictability of dividend income caused by dividends being decided after the ex-dividend date. South Korea is not even on the watchlist of candidate countries for index inclusion. Over the past 20 years, South Korea has attempted but failed to be included in this index. In the run-up to the presidential election, the call to fully resume short selling for inclusion in the developed market index can be seen as a kind of promise, but the fact that a goal not achieved in the past 20 years is now being presented as achievable feels somewhat uneasy. With the ruling party stepping forward and the government also stating that 'short selling must be fully resumed for inclusion in the developed market index,' I do not wish to pour cold water on this. However, it is hard to shake the impression that the developed market index inclusion is being presented as a carrot to quell opposition to the full resumption of short selling.

There is concern that the 55 million stock investors, who have flocked to the stock market due to the COVID-19 aftermath and failed real estate policies, may once again be subjected to false hope. It is time to recall once more that public trust is more important than achieving policy goals.