MSCI Keeps South Korea as an Emerging Market in 2013
MSCI does not disagree with the core tenets of FTSE’s argument, namely that the economic development, market size and liquidity of South Korea are at developed market standards. However, these characteristics were not enough to outweigh two central issues which MSCI cites as having made no progress from its June 2012 to its June 2013 reclassification studies.
• Limited Convertibility of the Korean Won: Investors are forced to trade the Korean won during Korean business hours and forced to use local counterparties. If Korea were to be upgraded, it would be the only developed market currency that was not freely traded—thus compromising the trading and liquidity of the developed market index-tracking strategies.
• Issues with In-Kind Transfers: Korea would be the only developed market to make in-kind transfers of securities prohibitive, were MSCI to make the upgrade.
MSCI closes its 2013 reclassification study with respect to South Korea by saying that until progress is made on both of these fronts, South Korea will not attain developed market status.
What is interesting about this MSCI discussion: If Korea had been upgraded to a developed market, we estimate that its weight would have been reduced to approximately 4%–5% of the developed world indexes as of September 30, 2013, but it is currently a large weight (i.e., three times as large) in the emerging markets index.
MSCI is using some important characteristics to demarcate emerging from developed markets—and it wants its developed world countries to share the free conversion of currencies and allowance of in-kind transfers. While these issues do impact the MSCI EM, they concern characteristics that apply to emerging markets and are more accepted in that universe.