MSCI Advanced Index Inclusion Gateway "Full Resumption of Short Selling, Caution Needed as Early as March"

[Asia Economy Reporter Lee Seon-ae] As the government pushes for the inclusion of the Korean stock market in the Morgan Stanley Capital International (MSCI) Developed Markets Index, controversy over the full reopening of short selling is intensifying. The securities industry expects that the full resumption of short selling could take place as early as March or April.

According to KB Securities on the 5th, the government is moving quickly to be included in the MSCI Developed Markets Index. The government's target schedule is ▲ June 2022 listing as a watchlist country ▲ June 2023 decision on inclusion in the MSCI Developed Markets Index ▲ June 2024 actual inclusion in the MSCI Developed Markets Index. Among the two key conditions required by MSCI, the improvement of the foreign exchange market has already been officially announced. The other condition, the full reopening of short selling, is currently under government review.

Ha In-hwan, a researcher at KB Securities, said, "To be listed on the watchlist by June as the government aims, short selling must be fully resumed by May at the latest," adding, "Considering the March presidential election, a decision on resuming short selling could be made this month, with the full reopening expected in March or April."

The securities industry holds the view that caution is needed in the short term regarding the full reopening of short selling, which must be resolved during the MSCI inclusion process. Typically, when short selling is allowed, the stock market shows a correction or sideways movement. However, the duration is usually around one month.

Researcher Ha said, "If included in the MSCI Developed Markets Index, the additional inflow of foreign funds is expected to be between 20 trillion and 65 trillion KRW," and added, "While this will be positive for the Korean stock market in the long term, the immediate issue to consider is the full reopening of short selling." He emphasized, "Since the full reopening of short selling could be a short-term burden, it is necessary to closely watch the authorities' decision on short selling this month, and caution will be needed in March and April when the full reopening is expected."

However, experts believe that the impact will be limited compared to before because short selling is already allowed on the KOSPI 200 and KOSDAQ 150.

Researcher Ha also said, "At the time of short selling implementation, the proportion of short selling amounts accounted for by the KOSPI 200 is over 80%, and for the KOSDAQ 150 over 60%," adding, "Even if short selling is allowed on other stocks, the overall market impact will be small."

If short selling is fully resumed, the KOSPI is expected to be relatively safer than KOSDAQ stocks.

Park Eun-seok, a researcher at Hanwha Investment & Securities, explained, "If Korea is included in the MSCI Developed Markets Index, the weight of domestic small-cap stocks included in the MSCI Emerging Markets Index should be reduced, and the weight of large-cap stocks should be increased." This is based on cases such as Israel and Greece, which were previously included in the Developed Markets Index, where the proportion of large-cap stocks increased and small-cap stocks decreased.

Individual investors have a very high level of aversion and resistance to short selling. The ban on short selling was originally scheduled to be lifted in August 2020 but was postponed to March of the following year due to opposition from individual investors, and then extended again to May.

Meanwhile, there is also analysis that foreign funds might actually withdraw if Korea enters the MSCI Developed Markets Index.

Researcher Park said, "Currently, the Korean stock market has passive funds inflowing through the MSCI Emerging Markets ETF amounting to 13.4 billion USD (16.14 trillion KRW)," adding, "Assuming Korea accounts for about 5.0% of the MSCI Developed Markets ETF, approximately 10.6 billion USD (12.77 trillion KRW) could flow into the domestic stock market. As a result, passive funds will be withdrawn from the domestic stock market."

This content was produced with the assistance of AI translation services.