Is Korea Ready for Developed Markets?

Saint Paul, Minnesota – November 5, 2014 – In their annual reclassification of countries, dated June 10, 2014, MSCI announced that both Korea and Taiwan were no longer being reviewed for reclassification into Developed Markets. The removal of Taiwan from consideration is consistent with Magni’s research; Taiwan has one of the lowest country scores arising from the application of the Magni Sustainable Wealth Creation principles of any country in Emerging Markets, let alone Developed Markets. Korea, on the other hand, ranks much higher.

Korea’s relatively high ranking is a recent development. At the beginning of 2012, only China and Taiwan were ranked lower than Korea. Now, Korea is the second highest ranked country among the Emerging Markets. They have even moved ahead of six countries in the Developed Markets.

Starting more than a decade ago, the Sustainable Wealth Creation principles have been used to build equity portfolios. Relative to their MSCI benchmarks, the Magni portfolios have demonstrated outperformance and part of this outperformance can be attributed to Korea. Specifically, the Magni allocation decisions regarding Korea have been shown to produce active return when compared to the market capitalization weighting in the benchmarks.

The most recent improvement in Korea’s ranking occurred in October. Magni upgraded Korea for its payment systems and securities regulation. Historically, reliable information about both of these areas within the Korea economic infrastructure has been hard to find and Korea’s country score has suffered from this opaqueness. Recent insights into Korean practices allows Magni to improve the country’s scores in these important areas, though there is still room for additional improvement. Not all of the changes improved Korea’s score as banking supervision was discovered to need more changes than previously identified. The improvements to payment systems and securities regulation more than offset the additional banking supervision gaps.

The MSCI 2014 announcement left open the potential to reconsider Korea and/or Taiwan for reclassification in a subsequent announcement. The continued improvements to Korean economic transparency and the actual improvement in their economic infrastructure make them a strong candidate.