Korea index change could impact emerging markets funds

26 June 2012 | By Rob Langston

The MSCI Korea index will stay as an emerging market, but is to be examined as part of the 2013 annual market classification review.

According to MSCI, the index meets most of the developed markets criteria of its classification framework.

“Notably economic development, market size and liquidity and many aspects of the market operational framework are at the level of developed market standards,” it reports.

However, the index setter raises several concerns, particularly over currency. Limitations over currency convertibility, the absence of an offshore currency market and lack of trading outside local market hours have been raised by MSCI. (article continues below)

Mark Mobius, a Franklin Templeton manager and emerging markets specialist, says: “The Koreans are desperate to be seen as a developed market, but they will be merged with North Korea [by investors].

“South Korea represents about 20% of the emerging market index, so if you take it out, it will mess things around.”

Adrian Lowcock, the senior investment adviser at Bestinvest, says: “In the MSCI Emerging Market Indices, the region is the third largest market after China and Brazil so its removal will have a big impact.

“It is a large industrial economy with a lot of exports and highly cyclical so geared to economic growth. It hosts the largest component of the index – Samsung – [which is] nearly twice the size of the next largest company and the technology weighting in emerging markets will be affected.”

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