The authors are Derivatives / ETF analysts from Shinhan Funding Corp. They are often contacted at [email protected] and [email protected], respectively. – Ed.

Deal with shares anticipated to hitch the MSCI Korea index

Morgan Stanley Capital Worldwide (MSCI) is ready to announce the Could 2021 Semi-Annual Index Assessment (SAIR) outcomes on the morning of Could 12 Korean time. Any change (inclusion / exclusion of constituents) will come into impact from the shut of the market on Could twenty seventh. We sometimes see extra modifications in a semi-annual overview than in a quarterly overview attributable to decrease market capitalization thresholds. The Could SAIR worth deadline is without doubt one of the final ten buying and selling days in April.

HMM (A011200), Massive Hit Leisure (A352820) and SKC (A011790) will most definitely be added to the MSCI Korea Index at Could’s SAIR, as they exceed the complete and free float market capitalization thresholds by greater than 20% in March 30. The inclusion of Inexperienced Cross (A006280) is anticipated to rely on the evolution of its share worth till the top of April, with its whole market capitalization presently hovering across the threshold.

SK Bioscience (A302440), listed on March 18, 2021, doesn’t meet the minimal buying and selling time requirement (three months earlier than SAIR), however could also be added to the index if it meets further necessities.

SK Bioscience: risk of inclusion for the examination in Could / August / November

To ensure that an IPO like SK Bioscience to qualify for inclusion within the MSCI Korea Index regardless of failing to satisfy the minimal buying and selling size requirement, it should meet the next necessities: 1) Deadline of the SAIR prize for Could or earlier than; 2) whole market capitalization higher than 1.8 instances the market dimension restrict per phase; and three) a free float-adjusted market capitalization exceeding 1.8 instances half of the brink.

The value deadline will probably be on the finish of April. SK Bioscience went public in March and thus meets the primary requirement. With the estimated market phase dimension threshold of KRW2.7tr for the Could SAIR, the corporate wants a full market cap of KRW4.1tr or extra and a free float-adjusted market cap of KRW2.4tr or extra to hitch the MSCI Korea Index. .

The potential free float of Bioscience, together with IPO shares offered to particular person or institutional buyers with a blocking interval of 1 month or much less, quantities to 16.2% of whole shares. The International Inclusion Issue (FIF), one of many elements used within the MSCI overview, is estimated to be 20%. In view of this, the corporate wants a share worth acquire of at the least 20% by the top of April for inclusion in Could’s SAIR.

The potential for index inclusion will increase for the quarterly index overview (QIR) of August 2021, the FIF being estimated at 25%. Besides, the likelihood is just not excessive on condition that SK Bioscience’s market cap as of March 30 doesn’t considerably exceed the August QIR thresholds. The inventory will seemingly be part of the MSCI Korea index at SAIR from November 2021 no later than the expiration of all lock-in agreements for institutional buyers.

Estimate of buy demand for potential entrants based mostly on previous information

The passive funds replicating the MSCI Korea index are estimated at KRW80tr, based mostly on the determine calculated by the MSCI in June 2019 and the evolution of the overall market capitalization of 18 ETFs listed in the USA replicating the MSCI EM index .

For Massive Hit Leisure (A352820), SKC (A011790) and Inexperienced Cross (A006280) among the many potential new entrants, we estimate that the demand to purchase passive funds (A) is greater than twice the each day commerce worth. medium (B). Stronger purchase demand relative to buying and selling worth ought to have a optimistic influence on the short-term efficiency of shares upon inclusion.

We analyzed the efficiency of newly added or eliminated shares from the MSCI Korea Index through the Could / August / November 2020 opinions for the next 4 intervals: 1) 45 days earlier than the announcement of the overview outcomes; 2) date of announcement; 3) interval from the date of announcement to the efficient date of inclusion / exclusion; and 4) intervals after inclusion / exclusion. New entrants outperformed the market through the 45 days previous to the announcement date (interval A) and through the interval from the announcement to the efficient inclusion date (interval B).

HMM shares rose 54% in March, partly reflecting expectations for the index’s inclusion. Whereas shares of Massive Hit Leisure and SKC additionally rose 17% and eight% respectively, shares of Inexperienced Cross fell 3%. We see additional uptick for Massive Hit Leisure, SKC and Inexperienced Cross given the typical extra return (48%) available in the market seen in Interval A of 2020 and the upper anticipated buy demand from the monitoring funds. indices in opposition to the typical each day buying and selling worth.

Change in buying and selling mannequin for international passive funds from August 2020 rebalancing

We examined the affect of the rebalancing of the MSCI index on the international passive funds (packages) that tracked the KOSPI within the eight earlier rebalancing occasions. It ought to be famous that international funds have unloaded their fairness holdings on the rebalance date since August 2020, with web gross sales standing at KRW1.5tr in August, KRW2.3tr in November and KRW2.4tr in February. A inventory sale on this scale had by no means been seen within the 5 rebalancing occasions earlier than August 2020.

We consider this development is just not attributable to a rise in funds passively replicating the MSCI Korea Index. Internet program purchases quadrupled within the final three rebalancing dates in comparison with 5 replenishment occasions earlier than Could 2020. The mixed market capitalization of the 18 US-listed MSCI Rising Markets (EM) ETFs jumped 34% from $ 90.2 billion in January 2019 to $ 120.7 billion in January 2021, however this determine is just not sufficient to clarify the robust web sale of this system. We don’t discover a clear correlation between program buying and selling by international buyers and modifications in Korea’s weight within the MSCI EM index earlier than / after rebalancing occasions.

Rising inflow of funds to comply with MSCI occasions; international capital outflows from Korea

In February 2021, MSCI opened a session round a proposal to make use of further filtering for any potential additions to the usual indices of the MSCI International Investable Market Indices, which exhibit an excessive improve in costs for an outlined interval previous a overview of the MSCI index. The variety of new parts exhibiting unusually excessive worth returns has elevated since Could 2020. MSCI has proposed to defer the inclusion of shares that meet the factors for excessive worth will increase, which is ready to extra returns over the nation sector common MSCI ACWI MIM on the deadline worth of a given index overview of at the least 100%, 200% or 400% for one, two or three months respectively. MSCI will announce the outcomes of this session on April 16.

We are able to assume from the MSCI proposal that there was an growing influx of funds to trace MSCI rebalancing occasions since Could 2020, which can clarify the robust web program sale seen within the earlier three occasions.

There may be one other factor to contemplate, which is the connection between cumulative buying and selling of KOSPI-listed fairness packages by foreigners and MSCI EM-related fund flows. MSCI EM ETFs have seen an inflow of funds since September 2020, whereas KOSPI has been weighed down by continued promoting of packages by international buyers. Foreigners are recognized to handle their portfolios based mostly on long-term methods, corresponding to excessive frequency buying and selling (HFT), market making and hedge funds. The prolonged short-selling ban in place since 2020 might have prompted international buyers to withdraw their cash from Korea.

The ban on brief promoting was imposed on March 13, 2020 and will probably be partially lifted for KOSPI 200 and KOSDAQ 150 shares from Could 3, 2021. The ban is lifted in most main international locations apart from the Korea and Indonesia.

Assuming the ban prompted foreigners to promote shares in massive portions on rebalance dates, the partial resumption of brief promoting ought to assist gradual international capital outflows. We have to preserve a watch out for replenishment occasions, given the rising affect of international buyers on short-term inventory costs because the MSCI index rebalances.

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