New York / Seoul: MSCI Inc., whose stock indexes are tracked by investors managing $3 trillion in funds, will decide within 12 months whether to reclassify South Korea and Israel as developed markets, possibly opening the way to attract more funds.
Positive view : Office buildings in the central district of Seoul, South Korea. An upgrade could bring more investment to the country as there’s more money in funds meant for developed markets
MSCI will decide based on each country’s economic development and the “accessibility of its market, including the efficiency of its operational framework, as well as on the role of geopolitical risk,” New York-based MSCI said 18 June. South Korea and Israel are now in MSCI’s emerging-market indexes. Most investment funds track indexes in developed markets, considered less risky. A record-high percentage of investors are taking on a “lower-than-normal” level of risk, Merrill Lynch and Co. Inc. said on Wednesday in its June fund manager survey.
“An upgrade would be a big positive as there’s more money in the developed-market funds,” said Kim Yong Tae, head of global investments at Yurie Asset Management Inc. in Seoul, which includes global index funds among its $4.9 billion in assets.
“This is a good time to move into the developed markets, since economic concerns are making investors risk-averse.”
MSCI will also consider dropping Argentina and Colombia from the emerging markets, while United Arab Emirates, Kuwait and Qatar may be raised to emerging markets from their frontier market status after a consultation process, according to the company’s statement. MSCI has changed how it classifies markets and is reviewing which countries should switch to a new group.
South Korea is the third-largest developing nation in MSCI’s stock benchmarks, representing 13.1% of the MSCI Emerging Market Index, according to data compiled by Bloomberg. Israeli stocks account for 2.43% of the MSCI Emerging Markets Index, according to Bloomberg data.
South Korean equities have a capitalization of 745 trillion won ($727 billion) on a so-called free-float adjusted basis, which includes only companies that overseas investors can readily buy and sell. The Kospi index, the stock benchmark, has fallen 8.2% this year. It closed down 1.9% at 1,740.72 points on Thursday.
An MSCI upgrade to developed status for South Korea may not have lasting benefits for the nation’s stocks because interest among developed-market investors would be confined to only the largest companies by value, Citigroup Inc. said in April.
MSCI said that institutional investors “remain concerned with the lack of full convertibility of the Korea won, including the lack of an efficient offshore market for the currency.” Israel, which won developed status from FTSE Group in September, is headed for the first annual stock market decline since 2002. The benchmark TA-25 Index has lost 7.3% this year.
A final decision on Israel and South Korea will be made no later than June 2009, MSCI said.
Argentina and Colombia may be dropped from their emerging-markets status “unless significant improvements in the relevant capital flow restrictions are observed,” MSCI said. So-called frontier markets typically have less-developed economies and financial markets than emerging markets, and have more restrictions on foreign stock ownership.
Argentina’s Merval index lost 7.6% over the past year, while Colombia’s IGBC has dropped 10%. Jordan, an emerging market, will be dropped to the frontier category at the end of November, MSCI said.
Tal Barak in Tel Aviv and Michael Tsang in New York also contributed to the story.