Two Weeks Until MSCI May Review: "NCSOFT Could Face Major Supply-Demand Shock if Excluded"

With about two weeks remaining before the May regular review of the Morgan Stanley Capital International (MSCI) index, there are expectations that Hanwha Systems and Samyang Foods may be newly added to the MSCI Korea Index, while Ecopro Materials might be excluded. In the case of NCSOFT, which has recently seen low trading volumes, there is a possibility of exclusion depending on the review date. If excluded, it is expected that the impact on supply and demand could be relatively significant.

Bae Cheolgyo, a researcher at NH Investment & Securities, stated in his report "MSCI May Regular Review Forecast" on the 30th, "At this point, the candidates for inclusion are Hanwha Systems and Samyang Foods, while the stocks with a high likelihood of exclusion are Ecopro Materials and NCSOFT." MSCI will announce the results of its May review on May 14 (Korea Standard Time), and in the previous review in February, only exclusions were made without any new inclusions.

He assessed that LIG Nex1, a secondary candidate for inclusion, falls slightly short of the market capitalization criteria, making its inclusion unlikely. In addition, he mentioned that HD Hyundai Marine Solution, HD Hyundai Mipo, and Rainbow Robotics could be reconsidered as candidates for inclusion in the next review in August, stating, "It is possible to take preemptive buy positions."

As for definitive exclusion candidates, he singled out Ecopro Materials. Bae explained, "Its free-float market capitalization falls short of the threshold, making its exclusion certain," and added, "NCSOFT may also be excluded if it fails to meet the global market capitalization standard on the review date."

He noted, "Due to the recent underperformance of Korean stocks relative to global stocks, the number of constituents in the MSCI Korea Index is on a declining trend as more stocks fall below the global minimum market capitalization requirement." However, he added, "In this review, the reduction in the number of constituents is expected to be limited due to adjustments in U.S. stocks, which have the greatest influence on the global criteria."

He also cautioned that downside volatility for excluded stocks could increase. This MSCI regular review will be the first since the resumption of short selling. Bae commented, "With the resumption of short selling, it has become easier to establish long-short positions, which could amplify the supply and demand shock caused by stock exclusions." He pointed out, "Past cases show that downside volatility for excluded stocks was higher during periods when short selling was allowed, compared to periods when it was banned."

He further stated, "For stocks with low trading value relative to the expected passive inflows, changes in supply and demand due to index inclusion or exclusion will have a greater impact on stock prices," and emphasized, "Even if more stocks are excluded than the market expects, investors should be wary of potential supply and demand shocks."

Assuming passive funds tracking the MSCI EM Index amount to around $390 billion, if Hanwha Systems and Samyang Foods are included, it is expected that passive inflows of 157.3 billion won and 209.5 billion won, respectively, will occur. Conversely, if Ecopro Materials and NCSOFT are excluded, passive outflows of 67.7 billion won and 98.5 billion won, respectively, are estimated. He added, "Given the low trading volume of NCSOFT, the supply and demand shock could be relatively pronounced."

Changes resulting from the MSCI May regular review will take effect on June 2. The rebalancing of passive funds tracking the MSCI index is scheduled for May 30, one business day prior.

Additionally, Bae noted that MSCI plans to revise its methodology for calculating the free-float ratio, switching from the current method of rounding up in 5% increments to a more detailed rounding method. He predicted, "This could make early inclusion of large IPO stocks more difficult." The revised methodology will be applied starting with the May 2026 review.