Korean Stock Market Fails to be Included in MSCI Developed Market Index
The Korean stock market has been left out of the Morgan Stanley Capital International (MSCI) Developed Market (DM) Index, according to recent reports. While English disclosure services aimed at expanding accessibility to foreign investors received positive reviews, the absence of an offshore foreign exchange market resulted in low scores for the Korean market.
MSCI conducts an annual market classification, and in the 2023 classification, there were no issues related to the Korean index belonging to the emerging market (EM) index. MSCI classifies stock markets worldwide into developed countries (DM), emerging countries (EM), and frontier (FM). The inclusion of the Korean market in the DM Index was expected to attract global fund flows and resolve the “Korea discount.”
To be included in the DM Index, the Korean stock market must be listed on the watch list for at least one year. However, it was not included in the list of candidates this time. The Korean market is expected to re-challenge for inclusion in the DM Index in June next year. If it enters the candidate group at that time, the official announcement of index incorporation will be made in June 2025, with the actual incorporation taking place the following year.
During the market accessibility evaluation conducted by MSCI earlier this month, out of 18 items evaluating investor accessibility to the Korean stock market, six items, including information flow, presented negative opinions, indicating the need for improvement. The market had anticipated a skeptical transfer.
MSCI pointed out that the Korean stock market lacks an “offshore foreign exchange market” where foreign exchange transactions can be made by converting won into foreign currencies. Additionally, restrictions on the domestic foreign exchange market continue. While MSCI gave positive evaluations to the foreign investor registration system and English disclosure, they expressed their opinion that they would re-evaluate when the related system is fully implemented.
“We welcome the proposed measures to improve access to the Korean stock market for foreign investors and will monitor the effectiveness of the system’s implementation in the future,” MSCI explained.
The exclusion from the DM Index is a setback for the Korean stock market, but efforts are expected to be made to address the issues raised by MSCI and improve accessibility for foreign investors.
Reporter: Kang Dong-won
Email: elesa1031@dealsite.co.kr
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What steps should Korea’s financial authorities and market participants take to fulfill the criteria for inclusion in the DM Index in future evaluations
Xpected by many experts, given the country’s economic strength and the size of its stock market.
However, the absence of an offshore foreign exchange market was a major factor in the Korean market’s exclusion from the DM Index. In order to be included in the DM Index, a stock market must have a well-functioning offshore foreign exchange market that allows foreign investors to easily trade and settle transactions. Without this infrastructure, the Korean market received low scores in MSCI’s assessment.
On a positive note, English disclosure services aimed at expanding accessibility to foreign investors received positive reviews. This indicates that efforts are being made to improve transparency and make information more readily available to international investors.
MSCI’s classification of stock markets is a significant factor for global investors in determining investment opportunities. Being included in the DM Index can attract more foreign investment and enhance a country’s reputation among investors. Therefore, the exclusion of the Korean stock market from the DM Index is a setback for the country’s efforts to attract international investors.
Korea’s financial authorities and market participants need to address the issues highlighted by MSCI in order to work towards fulfilling the criteria for inclusion in the DM Index in future evaluations. This may involve establishing an offshore foreign exchange market or implementing measures to improve access for foreign investors.
Overall, the exclusion of the Korean stock market from the DM Index is a reminder of the challenges faced by emerging markets in meeting the stringent criteria set by global market indices. However, it also highlights the importance of improving infrastructure and market accessibility to attract international investors and enhance a country’s position in the global financial market.
