September 21st will long be remembered in the Korean financial sector as the day the Korean stock market was born anew. That’s because the Financial Times Stock Exchange Group, better known as FTSE, has shifted Korea to the developed market status, a long awaited promotion in the global financial hierarchy. Today we’ve invited Mr. Seo Dong-pil, head of the investment strategy team at the Hana Daetoo Securities, to talk about the significance of the new FTSE status and the changes it will bring to the Korean financial market.

The Financial Times Stock Exchange or FTSE has long been a benchmark index for European investments. The fact that Korea joined the FTSE development markets indicates that the Korean capital market has matured substantially and it’s more stable and reliable than other newly emerging stock markets. By being given a new status, the Korean stock market now stands to gain more attention from large global institutional investors as a major investment destination.

The FTSE index divides the world’s capital market into four categories - developed, advanced emerging, emerging, and frontier markets. Along with the Morgan Stanley Capital International index, it’s one of the world’s two most recognized stock market indices. In particular, the FTSE index is most often used by European investors as a guideline for fund operation. So the placement as a development market would very likely lead to increased purchases of Korean stocks by global funds and inflow of foreign capital into the Korean stock market. Moreover, Korea would be recognized as a power player in the global equity market, together with the United States, Japan, and Hong Kong. Korea worked tirelessly to be upgraded to the developed market status while remaining among advanced emerging markets for a long time. What took the nation so long to join the upper tier in the FTSE index?

The developed markets include the North American and European regions. Investors in these markets look for market efficiency when assessing investment opportunities. In the past the Korean government strictly controlled the flow of foreign capital into the nation so as to prevent foreign money from exercising undue influence on the Korean market. But the situation has changed since the financial crisis in 1997. An influx of foreign investors at the time helped improve Korea’s accounting transparency. Also Samsung Electronics and Hyundai Motor are world-leading companies now, but they were grossly undervalued in the global market back then. What we Koreans considered blue chip stocks were not treated such in the global arena in the past.

The FTSE has been keeping a close watch on Korea to determine whether the country was worthy of joining the developed market group. Until recently, Korea’s closed stock market system and protective operational methods could not catch up with the open markets of advanced nations. Although South Korean companies were leading forces in the world’s electronics, steel, automobile, and shipbuilding industries, the nation’s small territory and tension-filled relations with North Korea worked against it and resulted in the undervaluation of Korean stocks. Subsequently, Korea went ahead with deregulation and set up mechanisms to protect investors, building up the foundation for an elevation in the FTSE standing. At last, 53 years after the Korean stock market opened, Korea was recognized as a developed equity market. What kind of changes will the new status bring to the nation?

Although the exact figure is hard to calculate, I expect foreign investors to purchase about 26 trillion won or over 21.6 billion dollars’ worth of Korean stocks in the long term. When foreign investors make investments, they refer to the benchmark index to determine whether the investments will be successful or not. In order to see good investment returns, they need to invest in the companies of developed markets. Since Korea now belongs to the developed market group, investors will tend to make more purchases of Korean stocks and the Korean stock market will see a greater arrival of foreign capital.

As Mr. Seo Dong-pil pointed out, the most noticeable benefit would be the import of quality capital. The money invested in the FTSE developed markets is generally conservative in nature and seeks long-term profits. So Korea stands to gain more than 21 billion dollars of reliable and long-term equity. The stability of international funds will help lessen the volatility of the Korean stock market and further strengthen the fundamentals of the Korean bourse.

Together with FTSE, the Morgan Stanley Capital International index is another leading stock market indicator. But Korea is yet to be named a MSCI developed market. The new FTSE standing is just a glass half full for Korea. So the nation’s next goal is to gain the MSCI developed market standing. The biggest obstacle to that objective is the accessibility to the Korean foreign currency market, but the Korean government is making steady efforts to remove that obstacle. Currently, Korea is considered the most likely market to be made a developed one, so the nation needs to be patient and continue to open up its stock market.

The MSCI is to American investors what the FTSE is to European ones. So if Korea is also named an MSCI developed market, the nation’s stock market will certainly be elevated to a higher level. In the meantime, Korea must continue its efforts to strengthen stock market fundamentals and create a foreign investment-friendly financial environment.