SOUTH Korea’s attempts to win a market upgrade from MSCI have been dealt a setback by the nation’s unexpected move last year to reimpose a full ban on the short-selling of stocks.
In its annual classification review, the index provider decided to maintain South Korea’s status as an emerging market, as expected. While the nation’s efforts to reform capital markets and currency trading hours had spurred hope for an upgrade to developed status, its prohibition of a common trading strategy is still seen as a barrier.
“The recent short-selling ban introduces market accessibility restrictions,” MSCI said in a statement on Thursday (Jun 20). “While this ban is expected to be temporary, sudden changes in market rules are not desirable.”
South Korea’s reintroduction of the prohibition has been controversial in the financial community, with critics saying it will reduce liquidity and the abrupt rule change hurt the market’s reputation. Regulators, who extended the ban through Mar 30 of next year, say they are trying to root out naked short-selling, which is illegal in the country.
The nation’s reforms have improved its chances for an upgrade if lawful short-selling is allowed to resume from Mar 31 as the government promised, according to Chang Hwan Sung, a portfolio manager at Invesco in Hong Kong. But there are still doubts as to whether the ban will be lifted fully or only partially, he said.
The government has focused on erasing the so-called “Korea discount” versus other global markets by improving corporate valuations and making the nation’s stocks a more attractive investment.
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An MSCI upgrade would help the market’s appeal with foreign investors, though for now South Korea remains at emerging status along with the likes of China and India.
“MSCI recognises and welcomes the recently proposed measures aimed at improving the accessibility of the Korean equity market,” the company said in the statement.
“As a reminder, potential reclassifications require that all issues have been addressed, reforms have been fully implemented, and market participants have had ample time to thoroughly evaluate the effectiveness of the changes.”
Ahead of its latest classification announcement, MSCI released its annual review of market accessibility. The firm said South Korea had made no improvements in its accessibility rating, and the country’s stock short-selling status had deteriorated to “-” from “+”.
MSCI had added South Korea to its developed-markets watch list in 2009. It then decided to remove the nation from that list in 2014 due to issues such as limits on currency-trading hours. BLOOMBERG
