Korea could attract up to 44 trillion won in foreign capital into its stock market over the medium to long term if it joins the MSCI Developed Market Index Watch List this month, according to a forecast. However, some analysts say that after Korea's actual inclusion in the developed market index in 2028, some capital outflows could occur due to deepening concentration in large-cap stocks and a decline in its weighting within the index.
According to the financial investment industry Monday, MSCI will announce its annual market classification results Friday. Market observers say the likelihood is rising that Korea will be placed on the Watch List for inclusion in the developed market index.
If Korea is added to the Watch List in this annual review, it is expected to be included in the MSCI Developed Market Index in June 2028 after an observation period of about 24 months. However, for actual inclusion, whether Korea improves the level of foreign exchange market liberalization during the observation period is expected to be a key task.
The securities industry expects that Watch List inclusion alone will improve the valuation, or stock price levels relative to earnings, of the domestic stock market. This is because the government plans to implement 71.8% of the 39 institutional reform tasks it is pursuing for MSCI Developed Market Index inclusion in the first half of the year, with additional institutional reforms following the related roadmap through next year.
In particular, analysts say that if exchange rate volatility falls through measures such as expanded foreign exchange market opening and improvements to the offshore won settlement system, foreign investors' access to Korea's stock market could improve. In addition, if the earnings volatility of domestic companies, centered on semiconductors, stabilizes, a medium- to long-term valuation re-rating may also be possible.
The securities industry estimated that, reflecting such medium- to long-term valuation improvement effects, about $29.2 billion (approximately 44 trillion won) in passive funds could flow into the domestic stock market.
On the other hand, if developed market index inclusion is confirmed in 2028, some capital outflows are also being discussed as a possibility. With global funds having recently flowed heavily into the MSCI Emerging Markets Index, related capital departures would be inevitable if Korea is excluded from the emerging markets index.
The developed market index also has stricter inclusion criteria than the emerging markets index, raising the possibility that small- and mid-cap stocks that fail to meet minimum market capitalization requirements could be excluded from the index. As a result, there are concerns that the concentration of large-cap stocks in the market could intensify. The securities industry projected that about $5.2 billion (approximately 8 trillion won) in passive funds could flow out following the actual announcement of developed market index inclusion.
