A growing number of analysts say Korea's stock market is likely to be added to the Watch List for the developed market index in Morgan Stanley Capital International's (MSCI) annual market classification, set to be announced early Wednesday Korea time. Securities firms expect that if the Watch List listing materializes, tens of trillions of won in capital will flow in, accompanied by a re-rating of corporate value as the Korea discount eases. On the other hand, some forecast that after the actual inclusion in the developed market index, partial capital outflows and a concentration in large-cap stocks could occur.
According to the financial investment industry on Wednesday, NH Investment & Securities (005940.KS) assessed that Korea is likely to be added to the Watch List in this MSCI annual review. The reasons are that the government plans to implement 71.8 percent of the 39 institutional improvement tasks it is pursuing for MSCI developed market inclusion by the first half of the year, and that MSCI has in the past reflected such institutional improvement efforts in its listing decisions.
The MSCI developed market index is a leading benchmark used by global institutional investors, pension funds, and passive funds as a standard for asset allocation. If actual inclusion takes place, it would mean that Korea's capital market is officially recognized as a developed market. However, considerable time is needed until final inclusion. If Korea is added to the Watch List this year, after about a 24-month observation period, inclusion would be decided in 2028, with actual index reflection likely occurring in 2029. The key variables are improvements in market accessibility, such as foreign exchange market liberalization and the establishment of an offshore won settlement network.
Securities firms expect that the Watch List listing alone will bring large-scale short-term capital inflows. Kim Kyu-jin, an analyst at NH Investment & Securities, estimated that "if the Watch List listing leads to lower volatility in exchange rates and corporate earnings, supported by expanded foreign exchange market opening, the establishment of an offshore won settlement system, and stabilization of the semiconductor industry, a capital inflow effect of about 29.2 billion dollars (about 44 trillion won) on a passive fund basis would be possible."
Some analysts say attention should be paid to the reduction of Korea's discount rate, beyond the scale of capital inflows. Shinhan Investment & Securities diagnosed in a report that "the essence of MSCI developed market inclusion is not short-term supply and demand, but mid- to long-term declines in capital costs and the normalization of the discount rate." Noh Dong-gil, an analyst at Shinhan Investment & Securities, explained, "Despite its high return on equity (ROE), Korea is trading at a low price-to-earnings ratio (PER) as the emerging market (EM) discount rate is applied," adding, "If reclassified as a developed market (DM), the investor base would shift toward long-term funds, which could produce an effect of easing the Korea discount."
The possibility of partial capital outflows after the actual decision on developed market index inclusion has also been raised. NH Investment & Securities analyzed that as Korea is excluded from the emerging market index, related passive funds could flow out, and its weighting within the developed market index could be relatively lower. It estimated the resulting capital outflow at around 5.2 billion dollars (about 8 trillion won). It also forecast that as some small- and mid-cap stocks are excluded from the index, the concentration in large-cap stocks could intensify.
Amid such expectations, the KOSPI has continued its rally day after day, moving one step closer to the 10,000-point mark. The KOSPI closed Wednesday at 8,864.24, up 137.64 points (1.58 percent) from the previous trading day, renewing its all-time high on a closing basis. SK hynix (000660.KS) closed at 2,521,000 won, up 5.84 percent, surpassing the 2.5 million won line for the first time ever.
