MSCI Inc, whose stock indexes are tracked by investors with about US$3 trillion in assets, said on Tuesday that Taiwan and South Korea had failed to win the developed-market designation from the New York-based index provider.
Taiwan and South Korea will maintain their emerging market status, MSCI said in a statement. The two countries, Asia’s biggest developing stock markets after China and India, will be evaluated again for a shift next year, it said.
Taiwan and South Korea weren’t upgraded amid issues including the lack of full currency convertibility and “rigidity” of the countries’ investor identification systems, MSCI said. South Korea also has “anti-competitive” practices relating to stock market data, MSCI said.
“We are not surprised by the outcome, but it doesn’t mean we don’t care,” Michael Lin (林火燈), spokesman for the Taiwan Stock Exchange Corp (台灣證交所), said yesterday by telephone. “We have been having discussions with investors and are constantly trying to improve areas where they deem it’s inconvenient for them.”
MSCI has requested that South Korea scrap a rule that the index compiler seek approval from Korea Exchange Inc in order to list futures and options overseas based on the MSCI Korea Index, Lee Joo-hwan, head of the market data team at Korea Exchange Inc, said by telephone yesterday.
The bourse continues to believe that’s an irrelevant issue for upgrading the nation to developed status, Kong Do-hyun, an exchange spokesman, said by telephone separately. The bourse will continue consultations with MSCI, he added.
“Both sides are trying to understand each other’s position, but we haven’t reached an agreement yet,” Chia Chin-ping (謝征儐), Hong Kong-based head of research for MSCI in Asia, said in a telephone interview.
The index provider’s decision means South Korea and Taiwan, the world’s 13th and 14th biggest stock markets, will lose out on purchases by investors who are restricted to developed-nation equities because of their perceived lower risk.
South Korea was already assigned “developed” status by FTSE Group, a rival index compiler, in September 2009.
“It won’t be a drag on the Korean market as expectations weren’t too high this time,” said Han Sang-soo, a fund manager at Samsung Asset Management Co in Seoul, which oversees about US$30 billion in assets. “Still, I think it’s only a matter of time until the promotion takes place because many of the market’s characteristics are already meeting the advanced standards.”
MSCI also delayed until December its decision on whether to raise the United Arab Emirates (UAE) and Qatar to emerging-market status.
Introduction of delivery-versus-payment, a program for completing stock transactions, may help lift UAE and Qatar from their frontier-market rankings. MSCI’s delay of the decision will allow more time for investors to assess the impact of the changes, MSCI said.
“The new system has been implemented; however, the MSCI criteria include a period of market participant assessment and feedback,” said Remy Briand, the global head of index research at MSCI Inc. “That’s really why we have this extension of the review: In order for various institutional investors to actually experience their trades and settlement through the new system over a period of time. We will review and get feedback over the next few months.”
An upgrade of the UAE and Qatar is likely to draw more investors as fund managers buy their shares to mirror MSCI’s indexes. Israel’s benchmark TA-25 Index has surged 64 percent in US dollar terms since MSCI announced the country’s promotion to developed-market status on June 16, 2009, compared with a 36 percent gain for the MSCI World Index.
MSCI in its statement cited “stringent foreign ownership limits” such as limited availability of shares to foreign investors as remaining concerns for the countries.
“This point has been more strongly voiced for the Qatari market,” the index provider said.
Under existing UAE law, foreign companies must have nationals as their sponsors and are limited to a maximum 49 percent ownership of businesses, except in free zones. Qatar caps overseas ownership at 25 percent.