South Korea, Taiwan again fail to achieve developed market status

London-based index provider FTSE Group has again left officials in South Korea and Taiwan disappointed, after it decided to keep them classified as advanced emerging markets, as it did in 2005 and 2006. The supplier of the world’s most used index series after the Morgan Stanley Capital Index (MSCI) also decided that China A shares did not meet the criteria for inclusion in its series as a secondary emerging market.

Moreover, FTSE’s annual review of country classifications promoted Israel to developed status from advanced emerging market status, and Hungary and Poland to advanced emerging from secondary emerging market status. Pakistan will be removed from the FTSE Global Equity Index Series (GEIS) in June 2008, as its stock market fails to meet the minimum quality of markets criteria.

FTSE classifies countries into three categories in the GEIS – developed, advanced emerging and secondary emerging – depending on a number of criteria, one of which is whether they have a developed derivatives market. The company publishes a yearly watch list of countries under review for promotion or demotion within these categories.

South Korea had been widely touted as a likely contender for an upgrade this year, with some parties suggesting that FTSE chief executive Mark Makepeace’s presence in the country for the announcement of the decision effectively marked a declaration of intent.

However, analysts say that while promotion to developed market status attracts more investment into a country, it also means that a reduced weighting for that country in many indexes. Investors usually put much more of their assets into developed markets than emerging ones, but an upgrade would make the markets small fish in the larger pool of funds available for developed markets, say analysts.

That change would be especially pronounced for South Korea, which has an 18% weighting in emerging market indexes, which would probably drop to between 1.5% and 2% in developed-market indexes.

The country satisfies most of the 21 criteria on which FTSE bases its decision. “Significant changes have been made to regulations and investment procedures in South Korea to assist international investors,” said the company in a statement. “In addition, an improvement plan has been published to remove restrictions on the free delivery of securities between accounts and to ease off-exchange transactions.

"Once these improvements are implemented, the only outstanding quality of markets criterion for developed markets not then being met would be the removal of restrictions in the foreign exchange market,” it added.

Meanwhile, Taiwan has made significant improvements, said FTSE, but market access remains restricted to international investors in four critical areas: a free and well-developed foreign exchange market; a liquid stock lending market; delivery free of payment for transferring securities between accounts; and off-exchange transactions.

As for China A shares, a substantial increase in qualified foreign institutional investment and the removal of foreign investment restrictions will be required if they are to join the FTSE GEIS. While Pakistan will be removed from the GEIS, FTSE will maintain a separate country index for Pakistan.

Following Israel’s promotion to developed status, FTSE will introduce a new index for developed markets in Europe, the Middle East and Africa for investors wishing to include Israel in their existing developed Europe portfolios.

Hungary and Poland – both of which have been promoted to advanced emerging status –in fact now meet the criteria for developed status, but will continue to be classified as advanced emerging until their World Bank GNI per capita rating classification is upgraded to high.

Finally, Greece will remain on the watch list and continue to be assessed for demotion from developed to advanced emerging status. “Some aspects of the Greek market remain restricted to international investors,” said FTSE.

The market continues to fall short of the requirements of a developed market in respect of five criteria: delivery free of payment for transferring securities between accounts; off-exchange transactions; omnibus custody account facilities for international investors; short sales restrictions; and a liquid stock lending market.