Saudi Arabia Likely to Be Included in MSCI Emerging Market Index

Saudi Arabia has emerged as another factor that could fuel foreign investors’ capital outflow from the South Korean stock market. Morgan Stanley Capital International (MSCI) announces its MSCI 2018 Market Classification Review, which determines the inclusion of each country into the MSCI indexes. Saudi Arabia is likely to be included in the MSCI emerging market index following China. If the Middle East country is included in the index, exodus of foreign capital can be accelerated due to portfolio adjustments among investment funds, especially passive funds.

Saudi Arabia’s state-run oil firm Aramco, which has the world’s biggest corporate value, is expected to be listed on the Saudi stock market within this year at the earliest. NH Investment & Securities Co. estimates the amount of funds outflow from the domestic stock market caused by Saudi Arabia’s inclusion in the MSCI EM index at US$5.8 billion (6.47 trillion won). The estimate is based on the assumption that the amount of funds following the MSCI index totals US$1.2 trillion (1,339.2 trillion won),
 

The benchmark KOSPI index closed at 2,340.11 on the 19th, down 36.13 points, or 1.52 percent, as most of the large-cap stocks except Samsung Electronics Co. and SK Hynix Inc. showed a steep decline. In particular, the secondary KOSDAQ market ended down 2.96 percent at 815.39 as most stocks were bearish except some bio and game stocks that had favorable factors. The KOSDAQ index fell below the 820 level for the first time since January 4 this year. Foreign investors sold 215.9 billion won (US$193.46 million) worth of stocks on the KOSPI market on the same day, going on a net selling spree for six days in a row. The amount of cumulative net sales came to 3.36 trillion won (US$3 billion) this year alone, more than the 3.13 trillion won (US$2.8 billion) of shares they net purchased last year.

The MSCI’s market reclassification has become another variable in foreign capital movements. The MSCI emerging market index includes South Korea. When Saudi Arabia, which failed to be included in the index last year, is included this year, the share of the South Korean stock market in the MSCI EM index will decrease from the current 15.36 percent. The inclusion of China A-shares in the MSCI EM index this year led to capital outflow from the domestic stock market. Saudi Arabia can hit the market once again.

Market experts warn that MSCI’s index adjustment can have a negative effect on foreign investment in the domestic stock market. Kim Byung-yeon, an analyst at NH Investment & Securities, said, “From the standpoint of passive funds, it is important that the portion of South Korean stocks is in the process of a long-term decline. When Saudi Arabia is included in the MSCI EM index, its portion will be around at 2.3 percent, reducing South Korea’s portion by 0.49 percentage point.”

As the central banks in advanced countries decided to raise their interest rates, the amount of passive funds investing in emerging countries is on the decrease. Accordingly, the share of South Korean stocks can decrease further. According to Mirae Asset Daewoo Co., there was a net capital outflow of US$1.34 billion (1.5 trillion won) from the 7th to the 13th amid a capital outflow from equity funds in emerging countries for four straight week. This stands in stark contrast to capital inflow to equity funds in advanced countries.