As Morgan Stanley Capital International (MSCI) has recently announced a plan to rebalance its emerging market index, Korea’s stock market has been divided over whether it will cause an outflow of funds.
MSCI has announced that it will raise the proportion of China A-shares in its emerging market (EM) index from the current 15 percent to 20 percent.
An official from CAPE Investment & Securities said on Nov. 11, “Despite concerns in the market, the probability of massive outflows from passive funds is limited.”
That seems a response to the view that net purchases of China shares by foreign investors could amount to up to 2 trillion won in light of previous cases. Han Ji-young, a researcher at the CAPE, predicted, “If China’s weight rises, it leads to a reduced proportion of other emerging countries included such as South Korea, Taiwan and Brazil,” adding, “There is the possibility of outflows from passive funds, but the pressure won’t be high.”
Samsung Securities said on Nov. 8, “As the number of additional China’s A-shares (mid-cap stocks) and the scale of additional market capitalization get larger than expected, the proportion of Korea gets lower,” pointing out that the country’s proportion is due to be reduced from 12.03 percent to 11.59 percent, a wider range of adjustment than that of MSCI’s August adjustment. Particularly, the Korean securities firm expected a net sale of up to 2 trillion won would be possible, citing as an example that the scale of net sales by foreign investorsreached 2.47 trillion wonduring the month of May, when the weight of Korean securities are reduced by 0.5 percent.
Yet there is a general view in the stock market that the scale of mechanical sales is not larger than concerned up until now. Foreign investors have reported net sales of 884.2 billion won in the securities market even since September, when it is a mini bull market. This is why they are expected not to sell more as the proportion of Korean shares still remains low. According to CAPE Investment & Securities, the current proportion of Korean shares stands at 12.19 percent, a low level than that of the inclusion MSCI will present at the end of November.
Some analysts explain the reason that the amount of net sales by foreign investors exceeded 2 trillion won is not because of outflows of passive funds following adjustments in MSCI index, but because of growing anxieties over the global economy, which are driven by a stalemate in the US-China trade negotiations and deepening trade conflicts between Korea and Japan. A property management company official said, “With the proportion of Korean shares reduced, the amount of net sales seems to be not small, but what matters is the market can absorb such outflows,” and adding “the short-term effects are inevitable, but the advance in the US-China trade negotiations instead of index adjustments is likely to become a variable to affect the fund outflows.”