Korea Waiting for Reclassification to MSCI Developed Markets
2010/02/18 11 Comments
Korea has shown a faster-than-expected recovery from the global economic downturn. However, things still remain uncertain as KOSPI dropped immensely due largely to shaky European countries along with signs of exit strategies from China and the US. This clearly shows Asia’s fourth largest economy still has a long way to go.
The MSCI Index is something we have to keep a close eye on. MSCI stands for Morgan Stanley Capital International Barra which is one of the four global major indices, including Dow Jones, S&P (Standard & Poor’s) and FTSE (Financial Times & London Stock Exchange). More than $500 billion around the globe flow along with MSCI Index. Most foreign investors mostly refer to this global indication and Korea is not an exception. Due to the last year’s reclassification of the FTSE Korea Index to Developed Markets, we now belong to Emerging Markets in MSCI Index, alone.
<MSCI International Equity Indices as of 2009>
<Source: MSCI Barra>
Under the current MSCI market classification framework for Developed Markets, Korea meets the economic development level as well as the size and liquidity requirements. We, however, regrettably failed to be revalued on MSCI Developed Markets half a year ago. Ahead of another review for a potential reclassification to Developed Markets as part of the 2010 Annual Market Classification Review taking place this June, let’s take a look at what left us in the Emerging markets.
Firstly, as we all know, we have a reclusive state facing us in the status quo, which is said to be one of the major obstacles when foreign investors are to put their money into South Korea. However, this geo-political barrier can’t be acceptable when it comes to being categorized as Developed markets where Greece, Israel and above all, the US exist with more fears of conflicts and terrorism.
Another point posed by MSCI is the lack of the offshore currency market for the won. An offshore market is what some advanced economies have worldwide. Nevertheless, the market alone doesn’t make a country a developed one. In fact, we have already lifted the real demand policy as pointed out by both FTSE and MSCI in 2007.
As far as regulations concerned, there exists Local Custodian defining that foreigners should open their own accounts in foreign exchange banks in order to transact foreign exchange. This aims to monitor foreign investors and regulate their massive, but ‘hot money’ in the domestic market. Apparently, the policy gives a bit of inconvenience for them to make a deal in the market. However, whether the troublesome process stems from our strict regulatory policy or from their credibility itself needs to be considered first.
The reclassification to MSCI Developed Markets is expected to affect Seoul enormously. Firstly, there will be a mixed effect with the elevation to Developed Markets. The portion we currently have in the Emerging Markets is larger than that of what we will in the Developed Markets, thus, the assets to be invested in the latter markets will be outnumbered by those from the Emerging Markets. However, the discouraging image of Korea Discount will soon disappear and our reputation will be highly appreciated in the global market, putting the economy firmly on the road to recovery.
Since we are the only country who belongs to MSCI Emerging Markets among those in FTSE Developed Markets and our counterpart is to be Taiwan this June, who seems less qualified than Korea, we have a rosy picture of being advanced to MSCI Developed Markets.