South Korea needs to work on opening up access to its capital market including extending currency trading hours, according to MSCI Inc., as the nation seeks an upgrade to developed market status.
(Bloomberg) — South Korea needs to work on opening up access to its capital market including extending currency trading hours, according to MSCI Inc., as the nation seeks an upgrade to developed market status.
Outstanding issues for Asia’s fourth-largest economy include the lack of offshore trading for the won as well as limits on short selling, MSCI said in its market accessibility review released late Thursday.
The concerns are similar to 2022’s review, although the index compiler said that measures announced by Korea’s government to address some of the worries “will be thoroughly evaluated with international institutional investors” once fully implemented.
“It isn’t a full surprise to us, the chance of being included in the developed market watchlist was half-half,” said Kiyong Seong, lead Asia macro strategist at Societe Generale SA. “The actual impact of reclassification to DM should be equity outflows, rather than inflows. Therefore, this should not be taken as a negative event to Korean equities in the medium term.”
Korea has a long-standing bid to join the league of developed market countries as it seeks to bolster its international reputation and attract foreign investments. President Yoon Suk Yeol has rolled out a slew of measures recently to rectify “outdated regulations” and better protect minority shareholders, which include removing registration requirements for overseas investors and improving transparency on dividends.
Authorities plan to significantly extend onshore trading hours for the Korean won, as well as allowing some offshore players to participate in the local interbank market starting next year. Due to historical reasons, trading in the currency is currently limited to local business hours, and foreign investors aren’t allowed to trade the won offshore.
The report is an early indicator for how MSCI views market accessibility in individual countries and comes ahead of an annual classification review later this month, where the index compiler may put certain nations on a watchlist for potential upgrade or downgrade.
MSCI Upgrade Bid Risks Backfiring for South Korean Stock Market
“It’s structurally difficult for Korea to be upgraded to DM,” said Bokyung Suh, an analyst at Sanford C Bernstein. “We’ve seen some measures from the Korean stock exchange and the government to upgrade the system, but those won’t be materialized in the next two to three years.”
A potential upgrade could drive some $56 billion of inflows into Korea’s equity market, according to Goldman Sachs Group Inc. It could also help narrow a perennial valuation discount versus global peers. However, some market watchers are doubtful about the outcome, as Korean stocks may face potentially lower weighting in the developed-market index.
Market accessibility is one of the three criteria that MSCI considers when it classifies markets into developed, emerging and frontier, alongside economic development, and size and liquidity. The index compiler dropped Korea from its developed market watchlist in 2014, saying it failed to meet the necessary criterion.
–With assistance from Jaehyun Eom and Marcus Wong.
(Adds analysts’ comments, more background.)
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