Is MSCI Inclusion a Positive Signal? 4 Out of 5 Stocks, Except POSCO International, Are on the Decline

Stock Prices Overheated Before Inclusion, Leading to Reduced Net Buying After Inclusion
Structural Changes in MSCI Tracking Funds Also Cause Decline in Inclusion Impact
Among 5 Stocks Included This Year, Only Posco International Shows Steady Rise

Recently, EcoPro, a hot stock, was newly included in the Morgan Stanley Capital International (MSCI) Korea Index, drawing attention to the stock price trends of the MSCI index inclusion and exclusion stocks. However, unlike in the past, the effect of foreign investor demand due to MSCI index inclusion is not significant, making it difficult to expect additional stock price increases, according to analysis.

In the recent August regular review, MSCI included four stocks in the MSCI Korea Index: EcoPro, JYP Ent., Hanmi Semiconductor, and Hanwha Ocean. Geumyang, which was considered a strong candidate, was excluded due to an extreme recent rise in its stock price. Emart and CJ, which were previously included, were excluded in this review. The results of this inclusion and exclusion will be reflected in the stock index from the start of trading on September 1. In other words, MSCI-related tracking funds will conduct replacement trades on the 31st of this month. MSCI regular reviews are announced four times a year in February, May, August, and November.

Among EcoPro shareholders, there is an expectation that this MSCI inclusion will act as a positive factor for the stock price. MSCI is a market index published by the American investment bank Morgan Stanley, with effective tracking funds reaching $400 billion (approximately 533 trillion KRW). It is the largest in the world in terms of tracking fund size among major indices. In the past, inclusion in the MSCI index tended to cause a sharp increase in foreign demand, leading to a rise in stock prices.

However, this trend has changed this year. As the inclusion stocks can be somewhat predicted, pre-trading has become active, and as a result, the net purchase volume after inclusion was not as large as expected.

Looking at the stock price trends of five stocks included in the MSCI index in February and May this year, there is a differentiated pattern by stock. KakaoPay (included in February) and KT (included in May) saw their stock prices fall by -0.16% and -2.4%, respectively, during the month following inclusion. Among the stocks included in May, Hanwha Aerospace rose only 1.60% in the month after inclusion. Cosmo Advanced Materials rose 32.67% during the same period but soon declined, closing at 155,900 KRW on the 11th, below the closing price at inclusion (160,900 KRW on May 12). Posco International is the only stock that has steadily risen since MSCI inclusion.

The reason why stock prices move in unexpected directions despite MSCI inclusion is that foreign demand does not come in as much as expected, unlike in the past. According to Samsung Securities' analysis of the demand impact on MSCI inclusion and exclusion stocks, the ratio of effective tracking funds to the free-float market capitalization (market cap of circulating shares) per stock is 6?6.5%. This means that by multiplying this ratio by the free-float market cap of the included or excluded stock, one can predict the scale of foreign net buying or selling.

However, for stocks included in the MSCI index this year, the actual net buying volume by foreign investors fell far short of this ratio. Cosmo Advanced Materials had the highest at 4.1%, followed by KakaoPay (3.0%), Hanwha Aerospace (2.5%), and Posco International (1.9%). KT had a foreign net buying ratio of only 0.7% relative to free-float market cap, indicating a very low effect from MSCI inclusion.

One reason for the shortfall in foreign net buying volume due to MSCI inclusion and exclusion is 'stock price overheating.' Kim Dong-young, a researcher at Samsung Securities, said, "The stocks included in May showed signs of price overheating before inclusion became visible, and the average price-earnings ratio (PER) of the three stocks excluding KT was 45 times, clearly showing this. KakaoPay likely also saw foreign investors hesitate to buy due to prior price strength," he analyzed.

Additionally, structural changes such as the increase in IMI (Investable Market Index) tracking funds compared to the standard index tracking funds that include the Korean index may have reduced the influence of index inclusion and exclusion. Researcher Kim Dong-young explained, "It requires further monitoring to see how much the foreign demand impact of MSCI index inclusion and exclusion will decrease."

What about EcoPro, a stock of national interest? EcoPro has a free-float market cap of 23.286 trillion KRW, so the expected foreign net buying volume calculated at a typical level is about 1.4 trillion KRW. However, considering EcoPro's recent sharp rise and the stock price trends of MSCI inclusion stocks this year, the actual demand effect may fall short of this. Lee Jae-rim, a researcher at Shinhan Investment Corp., said, "Stocks with formed consensus tend to show poor performance after digesting the MSCI inclusion news on the announcement day. It is advantageous to focus on stocks with a higher possibility of future inclusion rather than those already confirmed for inclusion."

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