MSCI Removes Korea, Taiwan From Developed-Market Consideration

MSCI Removes Korea, Taiwan From Developed-Market Consideration

Both Countries Are Two of Biggest in Emerging-Markets Index

NICOLE HONG and GREGOR STUART HUNTER

Updated June 10, 2014 6:32 p.m. ET

For now, you can keep counting South Korea and Taiwan as emerging markets.

Financial index provider MSCI Inc. MSCI -0.27% said late Tuesday that it will remove the nations from consideration for inclusion in its developed-market index. The two countries are currently the second- and third-largest components in MSCI’s Emerging Markets Index behind China, making up 27% of the index. Investors closely scrutinize the indexing decisions because they can trigger some funds to buy or sell assets.

MSCI has been reviewing South Korea for a potential upgrade since 2008, the same year that rival index provider FTSE Inc. upgraded it to developed-market status. Taiwan has been under review since 2009.

MSCI said the decision to remove South Korea and Taiwan from consideration was driven by “the absence of any significant improvements” in the accessibility of their stock markets to foreign investors in the past few years. For instance, investors are still limited in their ability to buy and sell the Korean won and Taiwan dollar during non-Asian trading hours.

“There was no specific trigger. It was more the lack of progress than anything else,” said Remy Briand, head of index research at MSCI.

The countries will be added back to the review list if there are any “meaningful improvements,” MSCI said.

MSCI hasn’t upgraded an emerging-market country to developed-market status since 2010, when it reclassified Israel.

Analysts and investors widely expected MSCI to keep the countries in its emerging-markets index.

About $1.4 trillion in assets is benchmarked to the MSCI EM Index, $243.1 billion of which is tracked by so-called “passive” funds that mirror the components of the MSCI. An upgrade would have forced these passive funds to sell their Korean or Taiwanese shares.

The rest of the money is tracked by active managers who use MSCI as a benchmark for their performance but are free to make bets that stray from the index. These managers have more flexibility in how they respond to changes by MSCI.

MSCI also announced Tuesday that it will continue to review China A-shares, or mainland-listed stocks denominated in yuan, for inclusion in the emerging-markets index.

Domestic Chinese shares have been under review for an upgrade since last year. Foreign investors have widely opposed the move, warning of difficulties accessing China’s markets and converting its currency.

An upgrade often can lead to enormous short-term gains for a country’s stock markets. Qatar and United Arab Emirates, which were upgraded to “emerging” from “frontier” status last summer after a four-year effort, initially saw stock prices soar. Dubai’s local stock market more than doubled in the 12 months following its upgrade but has fallen 12% in the past month now that the changes actually have been implemented to the benchmark.

After MSCI announces an upgrade or downgrade, it typically takes another three to 12 months for the index to implement the change. This gives investors time to adjust their positions ahead of the actual reweighting.