"16% Outperformance Over KOSPI"... Who Will Board the Last MSCI Train This Year?

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With the final Morgan Stanley Capital International (MSCI) regular review of the year approaching, market attention is focusing on the candidate stocks. As it is expected that two stocks will board the "last train" for MSCI inclusion this year, analysts advise investors to pay close attention to investment opportunities in these candidates, since stocks typically enjoy the benefits of index inclusion for about a month after being added.

According to the financial investment industry on October 21, the MSCI November regular review is scheduled to be announced on November 6 in the morning, Korea Standard Time. After the review announcement, rebalancing will be reflected in the closing prices on November 26, and the index changes will take effect the following day. The review reference date will be one day between October 14 and 27. Typically, the November review, which is the last review of the year, sees significant changes in the inclusion and exclusion of Korean stocks, but with the strong performance of the Korean stock market this year, experts predict that the results of the November review will be uneventful.

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This month, all five securities firms (Samsung, Yuanta, Korea Investment & Securities, Hanwha Investment & Securities, and Eugene Investment & Securities) that forecast the MSCI November regular review unanimously predicted that APR and HD Hyundai Marine Solution would be the two stocks to board the MSCI "last train" this year. HD Hyundai Marine Solution has received a green light for index inclusion, as its free float ratio, which previously hindered its inclusion, has risen. The second-largest shareholder, private equity fund KKR, sold its shares after the lock-up period ended, causing the free float ratio to surge from 20% in February to 35% in August. The estimated impact on supply and demand upon inclusion is approximately 128 billion won.

In the case of APR, its current market capitalization (about 900 billion won) falls short of the official inclusion hurdle (950 billion won). However, to fill the vacancy left by Orion, which is on track for exclusion from MSCI, experts generally agree that APR is almost certain to be included unless any special issues arise. Orion's current market capitalization is about 400 billion won, which is below the minimum condition for maintaining inclusion (420 billion won). Generally, to avoid exclusion, a company's market capitalization must be at least 67% of the cutoff (the inclusion threshold), and its free float market capitalization must be at least 33% of the cutoff.

As the MSCI "reshuffling" event approaches, the market is seeking investment opportunities in the newly considered inclusion and exclusion candidates. If a stock is included in the index, it can expect inflows from passive funds that track the index, but if it is excluded, it may face disadvantages in terms of supply and demand. For example, when Samsung Biologics was split, the newly established Samsung SP Holdings, which did not meet the index inclusion criteria, is estimated to see passive fund selling demand of about 254.8 billion won.

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Shin Chaerim, a researcher at Korea Investment & Securities, said, "Due to the nature of regular MSCI changes, the index change date when passive funds flow in is important, but there is also a tendency for supply and demand to increase and stock prices to rise even before the review announcement," emphasizing, "It is important to prepare in advance for the review announcement date, when the rebalancing target stocks are announced." Considering that the inclusion effect typically lasts for about a month after the index change, she explained that event-driven trading strategies for expected inclusion stocks remain valid for the remaining three weeks.

Kang Songcheol, a researcher at Eugene Investment & Securities, said, "For the reviews in May and August this year, newly included stocks saw their prices rise by an average of 19% from 45 days before the inclusion announcement to the announcement date, outperforming the KOSPI by 16%." He added, "In particular, in the case of APR, the recent quarterly earnings growth rate has significantly exceeded its stock valuation, so MSCI index inclusion can be considered an additional catalyst for further gains." APR's consolidated sales for the third quarter are expected to reach 366.7 billion won (up 110.6% year-on-year), and operating profit is expected to reach 84.9 billion won (up 211.6%), setting a new record for the company's highest-ever quarterly results.

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