South Korea's weight in the Morgan Stanley Capital International (MSCI) Emerging Market (EM) Index is expected to drop by 0.3 percentage point in a rebalancing scheduled for the end of this month. The amount of stock sales from passive funds due to the adjustment is estimated at 2 trillion won (US$1.65 billion), considering the recent rise in the won/dollar exchange rate.
The MSCI Index in August will be rebalanced based on the closing price on Aug. 27, according to securities industry sources on Aug. 15. In the EM Index, the proportion of large-cap China A-shares will be increased from 10 percent to 15 percent and the remaining 50 percent of Saudi Arabia shares will be included in the index.
The expansion in proportion of China A-shares and the inclusion of other countries will be carried out over three stages – the end of May, end-August and end-November. In May, the weight of China A-shares in the MSCI Index grew from 5 percent to 10 percent and Saudi Arabia shares were newly included with a 50 percent weight. Argentina was also newly included in the index. In November, the weight of large-cap China A-shares will be increased from 15 percent to 20 percent and mid-cap China A-shares will be newly included with a 20 percent weight.
When the quarterly rebalancing results in August, which was announced on Aug. 8, are reflected, the proportion of China in the EM index will rise by 0.3 percentage point at the end of this month, while that of South Korea will drop by 0.3 percentage point. Saudi Arabia will show the highest growth in proportion. The amount of South Korean securities sold due to a drop in weight is expected to reach 2 trillion won (US$1.65 billion), the largest capital outflow from the EM index since 2015.
By company, POSCO Chemical Co. is the only one to see a weight increase in the index adjustment this month. However, its effects on the index will be limited. Large-cap South Korean stocks will suffer a decline in weight, such as Samsung Electronics Co., SK Hynix Inc., Samsung Electronics Preferred Stock, Hyundai Mobis Co., Naver Corp., Shinhan Financial Group, Hyundai Motor Group, POSCO Group, KB Financial Group and LG Chem Ltd.
Samsung Electronics is expected to suffer the largest stock sales of 600 billion won (US$494.23 million) due to the index adjustment, followed by SK Hynix at 110 billion won (US$90.61 million), Samsung Electronics Preferred Stock at 84 billion won (US$69.19 million), Hyundai Mobis at 82 billion won (US$67.55 million), Naver at 56 billion won (US$46.13 million), Shinhan Financial at 55 billion won (US$45.30 million) and Hyundai Motor at 54 billion won (US$44.48 million). The figures are higher than those offered by the previous forecast last month because of the reflection of quarterly rebalancing results and the rise in the won-U.S. dollar exchange rate. Preferred stocks which have relatively a small number of transactions compared to market capitalization will be more affected by the stock sales as was the case in May.
Kang Song-chul, an analyst of Shinhan Investment Corp., said, “The uncertainties from the trade war between the United States and China remain in the short term because the United States is expected to impose additional tariffs on Chinese products in September. Accordingly, the MSCI issue will also be a risk factor for supply and demand.”