Today, South Korea is at the forefront of the debate about what constitutes the demarcation between an emerging and a developed market. Two major index providers, FTSE and MSCI, each champion one side of the argument. Below, we outline the basic tenets of each position and then discuss the ultimate considerations for investors.
Investors who utilize strategies designed to track the performance of the FTSE Emerging Markets Index (FTSE EM) are missing exposure to Korea, which constituted approximately 16% of the MSCI Emerging Markets Index (MSCI EM) as of September 30, 2013. We discuss why those tracking the FTSE EM may want to include additional South Korean equity exposure on a stand-alone basis to reduce potential differences in performance compared to the MSCI EM.
FTSE’s Upgrade of South Korea in 2009
At the September 2009 meeting of FTSE’s Policy Group it became official that South Korea was to be upgraded from emerging market to developed market status. The principal reasons of the decision involved:
• Size of Economy: South Korea is the 15th-largest economy measured by gross domestic product (GDP).
• Trade: South Korea is the 7th-largest exporter and the 10th-largest importer in the world.1
• Market Size: South Korea is the 13th-largest stock market in the world and the 3rd-largest in the Pacific Rim (behind Japan and Australia).2
Thus, the size of South Korea’s equity market, along with the scale of its economic development, outweighed any other considerations that FTSE may have had in terms of coming to its decision.