South Korea won a reprieve from MSCI Inc’s decision to keep China’s domestic equities out of its benchmark gauges.
The index compiler on Tuesday rebuffed China’s A-shares for a third time, surprising analysts from Goldman Sachs Group Inc and HSBC Holdings PLC.
Adding the stocks would have reduced Seoul’s 15 percent weighting in the MSCI Emerging Markets Index, forcing passive investors to pull cash out of South Korea’s market.
The KOSPI slid 0.2 percent at the close in Seoul, erasing an earlier gain, as investors weighed MSCI’s China move with a decision not to elevate South Korea to developed-market status.
“It is good news for Korean markets,” said Heo Pil-seok, chief executive officer at Midas International Asset Management in Seoul.
“I was worried about a 1 trillion won [US$850 million] outflow, but now that worry is resolved,” Heo said.
However, the relief might be temporary.
MSCI, whose developing market gauge is tracked by investors with US$1.5 trillion in assets, said it would reassess whether to add A-shares next year.
“It is only a matter of time because China is making efforts to improve its capital markets,” Heo said. “[South] Korea will have to think whether it would be good to enter developed markets.”
MSCI said South Korea would not be included on the list for a potential reclassification to developed market status as part of next year’s review because recent changes announced by the country’s Financial Services Commission would not take effect until next year.
“Investment frictions” related to the lack of convertibility of the won and restrictions imposed on the use of stock exchange data for the creation of financial products remain unaddressed, it said.
Opinion is divided on whether a promotion to developed market status would be good or bad for Korean equities. With a stock market capitalization of US$1.2 trillion, South Korea is one of the bigger emerging nations. However, it is small compared with developed markets like Japan, which has a US$4.9 trillion capitalization.
“The uncertainties are resolved and Korea has time to change the situation” to be included in MSCI’s developed index, said Lee Jung-ho, an analyst at Yuanta Securities Korea from Seoul.
“Although China’s A-shares could be added eventually, it’s not an issue for investors to worry about immediately,” Lee said.
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