Emerging markets will work better without Korea

Taiwan Semiconductor Manufacturing Co

Mon 03:40

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.
By Hudson Lockett

    HONG KONG, June 22 (Reuters Breakingviews) - When is an emerging market no longer an emerging market? Possibly when it looks something like South Korea does now. Whether MSCI agrees will determine on Tuesday whether the country returns to the index provider’s watchlist for developed market status 12 years after being booted off. That’s a big deal for Seoul but potentially a bigger one for financial institutions tracking MSCI’s benchmark emerging markets index, which no longer offers the broad exposure its name promises.
The lopsidedness of the MSCI Emerging Markets Index .dMIEF00000PUS — nearly a quarter of which is dedicated to Korean firms led by $1.5 trillion Samsung Electronics 005930.KS and $1.2 trillion SK Hynix 000660.KS, ranked second and third among top constituents — is partly due to a global rally in AI-related stocks. That has helped drive the benchmark up 26% in the first five months of 2026, compared to a less than 12% gain for an Ex-Korea version of the gauge; that performance has also been depressed by the almost one-third stock market drop in Indonesia, which MSCI may demote from emerging to frontier market status this week. Nonetheless, the divergence suggests the broader index is acting more like a side bet on Korean chip champions.
Viewed in this light, the administration of South Korea’s left-leaning, pro-market President Lee Jae-myung has done MSCI a favour this year by going full bore on reforms to at last secure developed market status, along with the sticky investment inflows that can sustainably follow. Here the most substantial progress came in May, when financial regulators finally expanded won-dollar trading hours to around the clock, starting in early July. A new won offshore trading system is being prepped for September, and Lee is also pushing to boost market transparency and English-language disclosures, among other measures.

    Sceptics argue Korea hasn’t made sufficient improvements to warrant watchlisting. But the index provider has proven reasonably flexible before - as in 2017 with China, where capital controls persist and the yuan’s convertibility remains under Beijing's strict control, which saw onshore stocks added to MSCI's benchmark and All Country World indices thanks largely to Hong Kong’s Stock Connect workaround.
True, removing South Korea from the emerging markets gauge would most favour Taiwan, also a major player in chips thanks to TSMC 2330.TW. Yet the removal would diversify the index's sectoral mix, with IT's weighting potentially dropping from 43% to 35%.
MSCI, for its part, tends to privilege liquidity and foreign exchange convertibility. But any upgrade would come a year after granting watchlist status at the earliest, and probably take another two or three years to phase in. The index provider has the chance to make a win-win move which stands to benefit both South Korea and emerging-markets investors with precious little risk to either, or to itself. 
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CONTEXT NEWS
       Index provider MSCI will announce the results of its annual market classification review for 2026 on June 23. The latest review comes as South Korea's government has taken steps to boost accessibility for foreign investors and open up its currency market in a bid to regain a spot on MSCI's watchlist for developed market status.

(Editing by Una Galani; Production by Aditya Srivastav)
((For previous columns by the author, Reuters customers can click on LOCKETT/ hudson.lockett@thomsonreuters.com))