Ahead of a key decision by MSCI, the index provider, on the potential inclusion of Korea in its developed market index, analysts here are showing mixed prospects.

Asia’s fourth-largest economy was taken off the review list for a potential upgrade to developed market by New York-based MSCI in 2014, having been added to the list in 2008. 


Some analysts see a bigger chance for Korea Exchange to get back on the list of the top grade of global market indices which is expected to be announced on June 14.

“Korea has moved closer to the goal as its identification system for foreign investors which was one of the issues previously highlighted by MSCI has been solved,” Kim Dong-young, an analyst at Samsung Securities said.

The Financial Services Commission is set to introduce the omnibus account system for foreigners trading local stocks, this month.

Kim said the government’s plans to extend stock market trading hours and foreign exchange trading session by 30 minutes shows its efforts to meet the guidelines set by the U.S. firm.

In February, Korea’s financial minister reached an agreement with the Chinese central bank governor to open the won-yuan direct trade market in Shanghai as a response to MSCI’s request for 24-hour trading of the won.

Back in 2014, the reviewers at the U.S. index provider cited lack of full convertibility of the Korean won, rigidity of the investor registration system, and anticompetitive practices regarding index-related financial products for Korea’s disqualification.

Among them, there are some remaining issues that need to be addressed including giving the Korea Exchange’s real-time market data to MSCI to create and sell derivatives to offshore investors.

“It’s likely to take more time to accept MSCI’s request on the data rights issue,” said Kim Young-oh, analyst at Hyundai Securities.

Even if the decision is positive, getting back on the list this year won’t lead to substantial changes in the local stock market as the actual addition to the developed market index can be decided next year and the change would take effect in 2018 at earliest, he said.

“For the time being, it’s not easy to meet with all the requirements that MSCI suggested as we are in the step of adding the Korea Exchange to the review list for a potential inclusion in the MSCI Advanced Markets Index, not the immediate upgrade,” an government official said.

Stock market analysts question the net benefit of the upgrade in a short-term perspective.

“With Korea’s inclusion to the developed market, outflow of passive and active funds from the Korean equity market are expected to reach some 5-7 trillion won ($4.2 billion-$5.9 billion) and 27 trillion won, respectively. But it all depends on their decision,” Kim Young-sung, an analyst at Mirae Asset Daewoo Securities.

Other countries, which moved to advanced market class from emerging market, such as Portugal, Greece and Israel, are found to have attracted less net inflow after the reclassification, according to industry data.

By Park Han-na (hnpark@heraldcorp.com)