Push for Korea's Inclusion in MSCI Developed Markets Index: Will it Resolve the 'Korea Discount'?

The Federation of Korean Industries (FKI) visited MSCI headquarters to strongly urge the inclusion of the Korean stock market into the Developed Markets (DM) index. With institutional improvements such as expanded English disclosures and forex market liberalization, expectations are higher than ever that the influx of global passive funds will help resolve the 'Korea Discount'.

Why MSCI Developed Markets Inclusion Now?

Currently, the market capitalization of the Korean stock market stands at approximately $5 trillion, ranking 6th globally. This surpasses several countries already in the MSCI DM index, such as Canada, the UK, and France. The FKI emphasized that the 'market accessibility' issues previously pointed out by MSCI have been largely resolved through recent amendments to the Capital Markets Act, the extension of forex market operating hours (until 2 AM), and the establishment of the Naked Short Selling Detection System (NSDS).

In particular, the reorganization of the securities trading and settlement system to meet global standards has significantly improved accessibility for foreign investors, which is evaluated as meeting the core requirements for DM inclusion.

Expected Market Benefits and Economic Effects

If the Korean stock market is upgraded from Emerging Markets (EM) to Developed Markets, the most anticipated benefit is the massive influx of global passive funds. When long-term investment capital, such as global funds and pension funds that track the DM index, flows in, the market's fundamental strength will be enhanced and volatility will be mitigated.

• Securing Stable Supply and Demand: The proportion of long-term foreign capital will increase, replacing short-term hot money.
• Revaluation of Corporate Value: Excellent domestic companies will receive equivalent valuations to their global peer groups, potentially resolving the chronic Korea Discount.
• Expectation of Large-Cap Rally: In the early stages of inclusion, foreign net buying is highly likely to concentrate on top-tier large-cap tech and semiconductor sectors.

Related FAQ

Q1. When will the entry into the Watch List be decided?

MSCI announces its Market Classification results every June. If the recently improved systems are evaluated positively enough by foreign investors this year, Korea could first be placed on the 'Watch List', and then officially included in the index after a grace period of 1 to 2 years.

Q2. What should be the investment strategy for retail investors?

As the possibility of inclusion in the DM index increases, attention should be paid to large-cap stocks (semiconductors, automobiles, finance, etc.) in the KOSPI that are favorable for foreign capital inflows. However, since temporary volatility may occur due to capital outflows from existing EM funds around the time of actual inclusion, a mid-to-long-term approach is recommended.