[Inside Chodong] What Matters More Than Inclusion in the Developed Markets Index

The long-standing aspiration of the Korean stock market?and a key presidential campaign pledge of President Lee Jaemyung?to be included in the Morgan Stanley Capital International (MSCI) Developed Markets Index is expected to come into clearer focus this weekend. In order to be included in the Developed Markets Index, a country must be designated as a Watchlist country for at least one year. The results of the "market accessibility assessment," which will be released on the 20th ahead of the official announcement on the 25th, will provide an early indication of whether Korea can enter the Watchlist.

Currently, Korea is included in the Emerging Markets (EM) Index, which is generally considered high-risk and high-return, alongside countries such as Brazil, India, China, the Philippines, Greece, and Egypt. Although Korea has already reached the level of developed markets in terms of stock market size and corporate competitiveness, it has repeatedly failed to cross the threshold into the Developed Markets Index due to institutional shortcomings and the closed nature of its foreign exchange market. Korea was placed on the Watchlist once in 2008 but was later removed, and all subsequent attempts by previous administrations have also failed.

This time, however, both the government and the market are showing clear signs of optimism. This is because many of the issues previously pointed out by MSCI?such as the full resumption of short selling, broader opening of the foreign exchange market, and improved accessibility for foreign investors?have been substantially addressed at the institutional level. Korea Investment & Securities stated in a recent report, "At this point, there are not many factors that would lead to a negative evaluation by MSCI. The likelihood of Korea being included in the Developed Markets Index has increased."

The new administration, which was inaugurated earlier this month, has even made inclusion in the MSCI Developed Markets Index a presidential campaign pledge. President Lee sees inclusion as essential for opening the era of "KOSPI 5000," which he has publicly promised, as it is a key indicator of stock market advancement and a major factor in attracting more foreign investors. Goldman Sachs previously predicted that if the Korean stock market is included in the MSCI Developed Markets Index, 75 trillion won could flow into the domestic market. The MSCI indices serve as a benchmark for global passive funds, and the Developed Markets Index in particular is used as a foundational investment model for pension funds, insurance companies, and index funds.

Inclusion in the MSCI Developed Markets Index would undoubtedly serve as an important milestone for the Korean market, as it would represent "official certification" of global trust in Korea’s capital market. However, it is risky to focus solely on inclusion itself or to become intoxicated by overly optimistic forecasts at this point.

Even if Korea is included in the index, it is difficult to be certain that this will immediately lead to an inflow of foreign capital. On the contrary, there is a possibility that Korea’s weighting in the Developed Markets Index could decrease, resulting in outflows of index funds. Israel’s stock market is a notable example; after being successfully upgraded to the Developed Markets Index in 2010, it experienced a double-digit decline over the following six months.

It is also important not to ignore the uncomfortable reality that Korea is still regarded as a high-risk country for long-term investors. Inclusion in the Developed Markets Index does not automatically translate into increased trust in Korea’s capital market.

Global investors continue to point out areas that Korea must improve, such as corporate governance, relatively low shareholder returns, lack of transparency in disclosures, and the need for greater policy consistency. To resolve the chronic "Korea discount" and earn the trust of investors, it is essential to go beyond institutional reforms and bring about substantial changes in market practices, supported by consistent political and economic policies. Of course, this is not something that can be achieved in the short term.

Regardless of the outcome, this announcement can serve as an opportunity to reflect on what progress has been made in Korea’s capital market and what structural limitations remain. The key issue is not simply whether Korea is included in the Developed Markets Index, but whether the market develops the structure and resilience needed to continuously build trust.Only ongoing reforms and consistent policies will lead the Korean stock market to become a truly developed market.