South Korea's inclusion in the Morgan Stanley Capital International (MSCI) Developed Markets Index has failed once again. In its annual market classification results released Tuesday, MSCI did not place Korea on the watch list for the developed market index, citing reasons such as restrictions on won conversion in the offshore foreign exchange market. In its earlier MSCI market accessibility review, Korea was also assessed as still facing constraints in five categories, including foreign exchange market liberalization. The Ministry of Economy and Finance and the Financial Services Commission stated, "If we steadily push forward with foreign exchange and capital market reforms, inclusion in the MSCI Developed Markets Index can come about naturally."
Although Korea was not added to the MSCI Developed Markets Index this time, the outlook ahead is not bleak. Since financial authorities are continuing institutional improvements—such as permitting 24-hour won-dollar foreign exchange trading starting next month and implementing an offshore won settlement network from next year—the possibility of inclusion could rise further going forward. Still, the shadows cast over Korea's stock market need to be examined coolly. The KOSPI has grown rapidly in a short period, rising from the 2,500 range to above the 8,400 level in just over a year to reach the world's sixth-largest, but behind the dazzling index lies the prevalence of "debt-fueled investing" and severe volatility that are taking their toll.
In particular, the side effects of high-risk products, such as the single-stock leveraged exchange-traded funds (ETFs) listed on the 27th of last month, are serious. The original purpose—stabilizing the exchange rate through a U-turn of "Seohak ants," or retail investors in overseas stocks—has been undermined, instead leading to results that amplify stock market volatility. The Bank of Korea even pointed out in a report that "leveraged ETFs are disrupting the market." Leveraged ETFs can serve as a lever to boost returns during rising markets, but in falling markets, redemptions and position adjustments occur simultaneously, raising significant concerns about amplifying market volatility.
The failure to be included in the MSCI Developed Markets Index should be turned into an opportunity to strengthen the transparency and stability of Korea's stock market. If the foundations of the capital market are weak, even inclusion in the developed market index could collapse in an instant like a sandcastle. The government and financial authorities must focus on mitigating the excessive volatility and the risks of high-risk products that eat away at the market's fundamentals. Now is not the time to be intoxicated by the world's sixth-highest stock price gains, or to be preoccupied with merely keeping up appearances to match global standards in form only.
