"Although Tens of Trillions Will Flow In When MSCI Includes It in Developed Markets..."

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hwang Junho] An analysis suggests that if South Korea is included in the Morgan Stanley Capital International (MSCI) Developed Markets Index, up to $36 billion (45.9 trillion KRW) in funds will flow in net, and stock market volatility will decrease. However, it is unlikely that the positive effects of inclusion will appear dramatically in the short term, and there are numerous preconditions that must be addressed regardless of index inclusion.

Seungho Lee, a research fellow at the Korea Capital Market Institute, stated in the report titled "Effects, Preconditions, and Implications of MSCI Developed Markets Index Inclusion," published on the 11th, that based on the market capitalization and weight of countries included in the MSCI Developed Markets Index as of March this year, South Korea’s share of market capitalization would be about 2.4% if included in the developed markets index.

Applying this weight to estimate the scale of newly inflowing funds, approximately $341 billion would flow into South Korea, and after subtracting the expected outflow of $305 billion, a net inflow of about $36 billion is anticipated. If the global market capitalization weight as of the end of 2019 (2.2%) is applied, the net inflow amount decreases to $5 billion.

However, Lee explained, "While net capital inflow would have a positive effect on domestic stock prices, it is difficult for a large-scale capital inflow to occur in the short term."

He also predicted that stock market volatility would decrease. He explained, "Looking at cases such as Israel, which was reclassified from emerging to developed market in 2010, and Greece, which was reclassified from developed to emerging market in 2013, after inclusion in the developed index, the long-term nature of investment funds and easing of country discounts led to reduced volatility in capital inflows and outflows. Conversely, the emerging markets index saw increased volatility in capital flows during times of global uncertainty."

However, MSCI recently pointed out in its market accessibility assessment report that, in addition to previous issues such as the absence of an offshore KRW foreign exchange market, mandatory registration system for foreign investors, and stock index usage rights, improvements are needed in six areas including information flow, clearing and settlement, and broker transfers. Without improvements in these areas, inclusion in the MSCI Developed Markets Index will remain distant.

Lee analyzed, "The government needs to faithfully implement the recently announced foreign exchange market advancement plan to establish the KRW’s status as an international currency and improve the mandatory registration system for foreign investors toward enhancing the effectiveness of omnibus accounts and international consistency. Efforts to improve the market’s underlying infrastructure, as mentioned by MSCI, should also be pursued in parallel."

He added, "Rather than aiming solely for inclusion in the MSCI Developed Markets Index itself, this should be seen as an opportunity to strengthen the fundamentals of our stock and financial markets by improving detailed tasks such as expanding stock market liquidity and enhancing market infrastructure."