[Korea‘s Bid for MSCI Developed Status]③Beyond Index Inclusion

Impact of MSCI Developed Market Inclusion: A Divided View
“Inclusion Marks a Beginning, Not the End”
Building Market Depth Through Long-Term Capital
Why Policy Predictability Still Matters

Being included in the developed market index is not a panacea. In order to sustain the KOSPI rally and resolve the chronic 'Korea discount' (the undervaluation of the Korean stock market), it is essential to first build a robust market structure and earn investor trust. This is why there is growing consensus that the Lee Jaemyung administration's pledge to join the Morgan Stanley Capital International (MSCI) Developed Markets Index should be seen not as a 'goal' but as a 'process.'

Will Inclusion Have an Effect? Hopes and Concerns Coexist

According to the financial investment industry on January 6, inclusion in the developed market index is expected to be a positive factor for the domestic stock market, as it could attract foreign institutional funds and enhance market stability. However, there are also concerns, as index inclusion does not automatically guarantee an influx of foreign capital or a fundamental improvement in the overall structure of the Korean stock market.

Optimists believe that joining the developed market index could bring about a meaningful change in market supply and demand. Professor Seok Byunghoon of Ewha Womans University’s Department of Economics said, "Since foreign institutional investment funds that track the MSCI Developed Markets Index would immediately reflect Korea’s inclusion in their portfolios, some investment banks estimate that up to 40 trillion won could flow in. There is a definite effect in supporting stock prices." Professor Lee Junseo of Dongguk University’s Business Administration Department (former President of the Korean Securities Association) also commented, "If Korea is included in the developed market index, we can expect more stable capital flows and reduced volatility."

On the other hand, there are also skeptical views about the inclusion itself. A senior official at a foreign securities firm noted, "Even if Korea is included in the developed market index, its weighting is likely to remain around 1.5%. Maintaining a roughly 9% share in the current emerging market index might actually be more advantageous." There are also significant concerns that small- and mid-cap stocks, with their smaller market capitalizations, could become even more marginalized by global investors, intensifying polarization toward large-cap stocks. This could potentially clash with the government's policy direction to revitalize the KOSDAQ market.

Namwoo Lee, Chairman of the Korea Corporate Governance Forum, also acknowledged concerns about polarization, stating, "There is a possibility that small- and mid-cap stocks will be neglected." However, he added, "Top market cap stocks could attract large-scale, high-quality capital inflows. This could help resolve undervaluation and contribute to achieving 'KOSPI 5000.'"

"Inclusion Is Just the Beginning" - Institutional Investors Must Play a Greater Role

Domestic capital market experts unanimously agree that the challenge of joining the developed market index should be viewed as a process and starting point for capital market advancement, not as an end goal. They argue that, regardless of index inclusion, it is far more important for the Korean capital market to build a sound structure and resilience.

The most frequently cited core task is expanding the base of institutional investors. There is growing criticism that the Korean stock market’s excessive reliance on individual investors leads to structurally heightened volatility. Hyoseop Lee, Research Fellow at the Korea Capital Market Institute, emphasized, "We must first foster institutional investors." A senior official at a foreign asset management firm also pointed out, "A common feature of developed markets is that long-term institutional investors form the backbone of the market. Without changing the investor structure, regardless of index inclusion, qualitative progress will be difficult."

For this to happen, the roles of the tax and pension systems are more important than ever. Research Fellow Lee urged, "We should convert retirement pensions to an indirect investment model similar to the U.S. 401(k) system, so that long-term funds naturally flow into the stock market, and expand tax incentives for long-term holdings." He also reiterated the importance of institutional investors, saying, "The National Pension Service must also play a quantitatively and qualitatively meaningful role in the domestic stock market."

The Lee Jaemyung administration’s already initiated corporate restructuring of listed companies must not remain a mere slogan. The longer the so-called 'zombie companies' with low profitability and growth remain in the market, the harder it will be to allocate capital efficiently and maintain market credibility. Restoring policy trust is also cited as a long-term challenge. Chairman Lee stated, "To be recognized as a developed market, it is crucial to maintain predictable policies consistently over the long term. However, among foreign investors, the short-selling ban was seen as too shocking," adding, "This is a long-term battle. We must take a long-term view and pursue capital market reform continuously and steadily."