MSCI May Add Israel, Korea as Developed Countries (Update1)

MSCI May Add Israel, Korea as Developed Countries (Update1)

By Fabio Alves and Tal Barak

June 19 (Bloomberg) -- MSCI Inc. will decide within 12 months whether to reclassify South Korea and Israel as developed countries, elevating them from its emerging market indexes.

MSCI, whose equity gauges are used by managers overseeing a combined $3 trillion, will also consider dropping Argentina and Colombia from the emerging market classification. United Arab Emirates, Kuwait and Qatar may be raised to emerging markets from their frontier market status after a consultation process.

The decisions will be based on each country's economic development and the ``accessibility of its market, including the efficiency of its operational framework, as well as on the role of geopolitical risk,'' MSCI said in a press release.

South Korea is the third-largest developing nation in MSCI's stock benchmarks, representing 13.1 percent of the MSCI Emerging Market Index, according to data compiled by Bloomberg. Israeli stocks account for 2.43 percent of the MSCI Emerging Markets Index, according to Bloomberg data.

South Korean equities have a capitalization of 745 trillion won ($727 billion) on a so-called free-float adjusted basis, which includes only companies that overseas investors can readily buy and sell. The Kospi index, the nation's stock benchmark, has fallen 6.5 percent this year.

An MSCI upgrade to developed status for South Korea may not have lasting benefits for the nation's stocks because interest among developed-market investors would be confined to only the largest companies by value, Citigroup Inc. said in April.

`Small Fish'

``It is possibly better to be a big fish in a small pond rather than a small fish in a big pond,'' Paul Chanin, a Singapore-based analyst at Citigroup, wrote in a note to clients on April 21. FTSE Group, MSCI's smaller rival, said in September that it will likely promote South Korea to ``developed'' in 2008.

An upgrade by MSCI would probably attract net buying of up to $7.7 billion in South Korea by funds that track the indexes, Chanin wrote at the time.

MSCI said today that institutional investors ``remain concerned with the lack of full convertibility of the Korea won, including the lack of an efficient offshore market for the currency.''

Israel, which won developed status from FTSE Group in September, is headed for the first annual stock market decline since 2002. The benchmark TA-25 Index has lost 7.3 percent this year.

Final Ruling

A final decision on Israel and South Korea will be made no later than June 2009, MSCI said.

Argentina and Colombia may be dropped from their emerging markets status ``unless significant improvements in the relevant capital flow restrictions are observed,'' MSCI said.

So-called frontier markets typically have less developed economies and financial markets than emerging markets, and have more restrictions on foreign stock ownership.

Argentina's Merval index lost 7.6 percent over the past year, while Colombia's IGBC has dropped 10 percent.

Jordan, an emerging market, will be dropped to the frontier category at the end of November, MSCI said.

To contact the reporters on this story: Fabio Alves in New York at falves3@bloomberg.net; Tal Barak in Tel Aviv at tbarak@bloomberg.net.

Last Updated: June 18, 2008 19:19 EDT