MSCI keeps Korea off developed market watchlist, but global analysts stay bullish

The MSCI logo / Reuters-Yonhap

MSCI's decision to keep Korea off its watchlist for potential inclusion in the Developed Market Index has pushed back expectations for index-driven inflows, but analysts say the setback does little to weaken investors' constructive view of the country's stock market, which remains underpinned by artificial intelligence (AI)-related momentum.

Wee Khoon Chong, APAC macro strategist at BNY, noted that the Korean stock market is in a favorable position thanks to AI-related growth momentum, even without inclusion in the Developed Market Index.

"Inclusion in the MSCI Developed Market Index would be welcomed, bringing additional passive inflows, but a status quo MSCI decision would not change investors' constructive investment thesis on South Korea," he added.

Korea was not added to MSCI's Developed Market Index watchlist in its 2026 market classification review, announced Wednesday. MSCI noted that underlying issues raised by global investors "have not been fully resolved."

Korea was first included in the Emerging Markets Index in 1992 and was placed on MSCI's watchlist for potential inclusion in the Developed Market Index in 2008. In 2014, Korea was removed from the watchlist altogether because of difficulties related to Korean won convertibility and restrictions on the use of exchange data.

The Korean government has been implementing policies to address concerns raised by overseas investors, including mandatory English disclosures by all listed companies, 24-hour operation of the foreign exchange market and offshore Korean won settlement. It believes that the large pool of overseas funds tracking the MSCI Developed Market Index could support the stock market and help stabilize the Korean won.

Benson Wu, Korea economist at Bank of America Global Research, said the outcome broadly aligns with market expectations that additional time is required to demonstrate the durability of recent reforms.

"While Korea has made meaningful progress on market access ... MSCI typically looks for sustained evidence of implementation, usability and consistency. In this context, the upcoming launch of 24-hour Korean won trading from July 2026 may require a period of observation," Wu said.

MSCI cited the won’s limited offshore convertibility as a key barrier. It also said operational adoption of omnibus accounts and in-kind transfers remains limited, and that market participants continue to face significant operational burdens under the reinstated compliance regime following the lifting of the short-selling ban.

The Ministry of Finance and Economy said in a statement that it will continue to implement reforms so that Korea can be included among advanced economies.

However, Alexander Redman, chief equity strategist at CLSA, questioned whether inclusion would benefit the Korean market.

Korea currently accounts for more than 20 percent of the MSCI Emerging Markets Index, allowing it to benefit significantly from inflows from emerging market-tracking funds. He said inclusion would turn Korea from "a big fish in a little pond to a very small fish in a very large pond."

"What you would get is forced divestment from all of the emerging market funds," Redman said. "Sure, the clinical funds can come in. Very sure they're going to buy the semiconductors. Are they going to buy the rest of the market? That's a big question, and that remains unresolved."