Henry M. Seggerman
President of International
Everybody knows that a great deal of
money follows the MSCI Developed Markets Index
-- two or three
This ensures the KOSPI will jump at least
10% -- and perhaps a lot more -- when Korea finally gets upgraded from an
Emerging Market to a Developed Market.
The question is: why is this upgrade
taking so long?
Seven years ago, MSCI’s key
Developed Market upgrade hurdle was sustainable
“High Income” GNI per capita, which then hovered
Korea, still recovering from the
1997 currency crisis, was just below this
But before long, Korea got above the “High Income”
ranking convincingly, in 2001, 2002, and 2003,
satisfying MSCI’s requirement, and sustaining
In August, 2004, about
three weeks after the World Bank’s official
announcement of final approved 2003 national
per-capita GNIs, MSCI hurriedly disseminated a
questionnaire to investment professionals
This questionnaire did not ask if Korea should be upgraded; instead, it suggested
strongly that MSCI was adding “geo-political
risk” (read: North
Korea) as a new hurdle
which would bar South Korea
from being upgraded to Developed Market status.
Geo-political risk had virtually never
been mentioned by MSCI prior to this as a
MSCI was moving the goalposts just to
Today, with the Yongbyon
reactor 90% disabled, with the New York
Philharmonic playing Pyongyang, with the Kaesong
Industrial Park and Mount Keumkang still humming
with activity, whatever geopolitical risk
existed a few years ago has largely dissipated.
Thus, it must be time for MSCI to publish
another document ruling out a
So, a few weeks ago, MSCI
came out with a new document with a brand-new
hurdle never mentioned at any time in the past:
fully convertible currency.
MSCI is now arguing that a fully
convertible currency, which allows forex traders
to buy and sell a country’s currency at will,
should be considered as a hurdle for upgrading a
country to a Developed Market.
Never mind that currency
trading is largely irrelevant to MSCI’s actual
business focus, stock trading.
Never mind that, if you want to trade the
Korean Won, you can do so easily by trading
Non-Deliverable Forwards (NDFs).
No, MSCI’s new rule is if your currency
is not fully convertible, you can just forget
about that upgrade to Developed Market status.
Once again, MSCI is moving the goalposts
for the sole purpose of keeping
out of its Developed Markets Index.
Think about the Hong Kong
Dollar Peg for one second, and you will realize
how unfair and hypocritical MSCI is.
Say you’re an asset manager in
Japan or Europe with assets indexed to MSCI’s Developed Markets
OK, if that is the case, then you are
obligated to invest in stocks listed on the Hang
Seng Index in Hong Kong. If
the business of those companies is good, their
stocks should go up.
However, they won’t go up all that much
if the U.S. Dollar keeps falling, as this
crushes the value of the Hong Kong Dollar
relative to the Yen, Euro and other currencies.
The Hong Kong Dollar Peg is
extraordinarily inefficient, and damaging to all
non-American investors who invest in
Does MSCI say anything about the Hong
Kong Dollar Peg?
Of course not.
All they care about is keeping Korea out of the
They have no concerns whatsoever about
those well-mannered former English colonies Hong Kong, Singapore
already safely tucked away in their exclusive
What is continuously
amazing to professional asset managers is how
blind MSCI is to the many airtight, compelling
truths proving Korea already is a Developed Market:
– Serious professional asset managers require
actively traded stock markets, and
Its stock market is the
twelfth most liquid in
the world, trading on average $7 billion each
The New Zealand
stock exchange by comparison trades
million per day.
-- Serious professional asset managers
require world-class blue-chip companies, and
has them. Korea has the top six shipbuilding,
the top two memory chip, and the top two picture
tube companies in the world -- as well as
world’s #1 high-speed internet provider.
Korea is an industrial powerhouse,
and its world-class companies rank amongst the
best equity investments in the world.
For inclusion in MSCI indices, companies must be
above minimum levels in terms of Company Size,
Security Size, and Security Liquidity.
Specifically, to qualify for inclusion, a
company must have a market cap exceeding $2
billion and a free float exceeding $1 billion.
In the report issued a few weeks ago,
MSCI revealed for the first time that for a
country to be included in its Developed Markets
Index, it must have at least five qualifying
One thing is obvious in MSCI’s revelation of its
requirement of five companies: it’s a number
conveniently manufactured after the fact to
justify the inclusion of miniscule markets like
New Zealand, Greece and Portugal – each with but a
thimbleful of serious companies – in its
Developed Markets Index.
FOREIGN OWNERSHIP --
Serious professional asset managers require
stock markets which already have high levels of
foreigners’ ownership, as it bespeaks an obvious
faith on the part of other foreign investors in
In this regard, Korea is extremely
attractive, as its stock markets are 32% owned
by foreigners, higher than any MSCI Developed
Market and higher than any country with equal or
greater market capitalization, with many
blue-chip companies 50-60% owned by foreigners.
This is an obvious big vote of confidence
coming from the international investment
Korea scrapped virtually all foreign
ownership limits ten years ago; under
1% of Korean companies have foreign ownership
limits today, less than many Developed Markets.
PERCEPTION – Serious
professional asset managers require markets
which are stable because the financial industry
as a whole perceives them as mature (Developed)
A few years ago
FinanceAsia magazine conducted a poll which showed that 83% of
respondents favored upgrading
to a Developed Market and 90% viewed
as more developed than
few years ago, MSCI itself stated that “investor
perception …is very important to MSCI and will
be carefully considered,” with regard to market
MSCI knows full well that professional
asset managers have viewed Korea as a Developed Market for many
So, when MSCI asserts that “investor
perception is important,” they are lying.
The truth is that MSCI has no interest
whatsoever in what anybody thinks about Korea.
What is the next step?
--I suppose we could urge “Bulldozer” to
make Korea’s currency fully convertible,
to satisfy MSCI’s latest rule.
That he could probably accomplish in a
five-minute phone call.
However, it’s unlikely to change MSCI’s
If it were to happen, MSCI would probably
just move the goalposts once again and spit out
another brand-new rule.
Maybe they should simplify the
process next time and just say “We don’t allow
in countries where they eat kimchi.”
Some have theorized that
the real reason MSCI won’t upgrade Korea is
MSCI revenue comes from subscriptions
paid by thousands of asset managers worldwide.
A subscription to MSCI Developed Markets
data costs $43,000, but a subscription to both
Developed and Emerging Markets data costs
If Korea were to
exit MSCI’s Emerging Markets platform, it is
believed that many of the asset managers who
subscribe to both Emerging and Developed would
drop the Emerging Markets data subscription and
subscribe only to Developed Markets data.
This would result in a big hit to MSCI’s
MSCI’s obsessive campaign to exclude
is so bizarre and irrational, it makes theories
about their ulterior motives credible.