Despite Kospi's Leap, MSCI Has Not Raised South Korea's Status

JAKARTA - The Kospi index is the best performing stock exchange in the world this year. However, MSCI still maintains South Korea in the emerging market category. The main obstacle is the Korean won trading rules.

According to a CNBC report quoted on Friday, June 26, MSCI CEO Henry Fernandez said South Korea is one of the most advanced countries in the world in terms of economy, technology, and society. However, MSCI assesses the market status from the way the stock market works.

"Our main focus is the way the stock market works. In that regard, they show many characteristics of emerging markets," Fernandez said on CNBC's Squawk Box Europe program.

The Kospi index, which contains the shares of large companies such as Samsung and SK Hynix, has jumped 112 percent so far this year.

However, MSCI still maintains South Korea in the emerging market category. Fernandez said the main obstacle was the restrictions on trading the Korean won.

According to Fernandez, investors in developed markets can buy and sell currencies for stock transactions as needed in various world financial centers. That pattern has not been fully applied in South Korea.

"The only place you can buy Korean won is during business hours, the daily trading hours in Seoul," Fernandez said.

This condition makes it difficult for index fund managers when rebalancing the South Korean stock portfolio. Index funds are investment funds that follow the movement of certain indices, such as the Kospi or global stock indices.

Fernandez said that one-third of global funds managed based on indexes come from index funds.

He acknowledged that the reform of South Korea's financial system is underway and that progress is great. However, the issue is not just trading hours. MSCI also highlighted the liquidity of the currency market.

Liquidity means the ease of buying or selling an asset without making the price move too far.

"If Korea wants to rely on the won trade at night so that we in London and New York can trade it, the question is whether it will be a large pool of liquidity with a narrow bid-ask spread? I doubt it," said Fernandez.

The difference between the selling and buying prices is the distance between the price the seller asks for and the price the buyer is willing to pay. The thinner the distance, the more efficient the market usually is.

MSCI this week published a review of country classification. South Korea remains in the emerging market category. The decision disappointed Seoul's hopes of being included in the MSCI advanced market watch list, the initial stage before a class upgrade.

MSCI also mentioned other reasons. Among them are a rigid investor identification system, restrictions on transfers in the form of goods, off-exchange transactions, and restrictions on investment products due to exchange data usage rules.

"Investors conveyed that the fundamental issues have not been fully resolved," MSCI said.

South Korea is preparing to launch 24-hour trading in the spot dollar-won market on July 6. However, Fernandez said the biggest challenge is to ensure the market remains deep and liquid, even at two in the morning.

"It's difficult," he said.

Seoul has long been trying to enter the MSCI advanced market category. On the other hand, South Korea has been classified as an advanced market by FTSE Russell.

Earlier this year, the Kospi overtook the London FTSE 100 and became the eighth most valuable national stock index in the world.