The authors are derivatives/ETF analysts of Shinhan Funding Corp. They are often reached at email@example.com and firstname.lastname@example.org, respectively. – Ed.
Give attention to shares anticipated to hitch MSCI Korea Index
The Morgan Stanley Capital Worldwide (MSCI) is about to announce the outcomes of the Might 2021 Semi-Annual Index Assessment (SAIR) on the morning of Might 12 in Korean time. Any adjustments (inclusion/exclusion of constituents) will take impact as of the shut of market on Might 27. We sometimes see extra adjustments at a semi-annual assessment than at a quarterly assessment attributable to decrease market cap thresholds. The worth cutoff date for the Might SAIR is any of the final ten buying and selling days of April.
HMM (A011200), Massive Hit Leisure (A352820) and SKC (A011790) will extremely possible be added to the MSCI Korea Index on the Might SAIR as they prime each the total and free float market cap thresholds by greater than 20% as of March 30. The inclusion of Inexperienced Cross (A006280) ought to hinge on its share value efficiency by means of end-April, with its full market cap at present hovering across the threshold.
SK Bioscience (A302440), listed on March 18, 2021, fails to fulfill the minimal size of buying and selling requirement (three months earlier than SAIR), however could also be added to the index if it satisfies extra necessities.
SK Bioscience: Chance of inclusion for Might/Aug/Nov assessment
To ensure that an IPO like SK Bioscience to high quality for inclusion into the MSCI Korea Index regardless of its failure to fulfill the minimal buying and selling size requirement, it should fulfill the next necessities: 1) listed on or earlier than the worth cutoff date for the Might SAIR; 2) full market cap above 1.8 instances of the Market Dimension-Phase Cutoff; and three) free float-adjusted market cap exceeding 1.8 instances one-half of the Cutoff.
The worth cutoff date might be finish of April. SK Bioscience went public in March and thus meets the primary requirement. With the Market Dimension-Phase Cutoff estimated at KRW2.7tr for the Might SAIR, the corporate wants a full market cap of KRW4.1tr or larger and a free float-adjusted market cap of KRW2.4tr or larger to hitch the MSCI Korea Index.
Bioscience’s potential free float, together with IPO shares bought to particular person buyers or institutional buyers with a lock-up interval of 1 month or much less, quantities to 16.2% of complete shares. The International Inclusion Issue (FIF), one of many elements used within the MSCI assessment, is estimated at 20%. Contemplating this, the corporate wants a share value acquire of at the least 20% by end-April for inclusion on the Might SAIR.
The opportunity of index inclusion rises for the August 2021 Quarterly Index Assessment (QIR), with the FIF estimated at 25%. Besides, the chance just isn’t excessive on condition that SK Bioscience’s market cap as of March 30 fails to exceed the August QIR thresholds by a large margin. The inventory will possible be part of the MSCI Korea Index on the November 2021 SAIR on the newest upon the expiration of all lock-up agreements for institutional buyers.
Shopping for demand estimation for potential entrants based mostly on previous knowledge
Passive funds monitoring the MSCI Korea Index are estimated at KRW80tr, based mostly on the determine calculated by the MSCI in June 2019 and the adjustments within the complete market cap of 18 US-listed ETFs monitoring the MSCI EM Index.
For Massive Hit Leisure (A352820), SKC (A011790) and Inexperienced Cross (A006280) amongst potential new entrants, we estimate shopping for demand from the passive funds (A) to be greater than twice as giant as the common every day buying and selling worth (B). Stronger shopping for demand vs. buying and selling worth ought to have a constructive influence on short-term share efficiency upon inclusion.
We analyzed the efficiency of shares that have been newly added or faraway from the MSCI Korea Index on the Might/August/November 2020 opinions for the next 4 intervals: 1) 45 days working as much as the announcement of assessment outcomes; 2) announcement date; 3) interval from the announcement date to the precise inclusion/exclusion date; and 4) intervals after inclusion/exclusion. The brand new entrants outperformed the marketplace for the 45 days as much as the announcement date (Interval A) and through the interval from the announcement to the precise inclusion date (Interval B).
HMM shares gained 54% in March, partially reflecting expectations for the index inclusion. Whereas Massive Hit Leisure and SKC shares additionally rose by 17% and eight%, respectively, Inexperienced Cross shares fell 3%. We see additional upside for Massive Hit Leisure, SKC and Inexperienced Cross given the common extra return (48%) over the market seen throughout Interval A of 2020 and stronger shopping for demand anticipated from index-tracking funds vs. common every day buying and selling worth.
Change in international passive fund buying and selling sample from Aug. 2020 rebalancing
We appeared into the affect of MSCI index rebalancing on international passive (program) funds monitoring the KOSPI within the eight earlier rebalancing occasions. It’s value noting that international funds have unloaded their inventory holdings on the rebalancing date since August 2020, with web promoting amounting to KRW1.5tr in August, KRW2.3tr in November, and KRW2.4tr in February. Inventory promoting on that scale had by no means been seen through the 5 rebalancing occasions earlier than August 2020.
We consider this development just isn’t brought on by a rise in funds passively monitoring the MSCI Korea Index. A fourfold improve in web program shopping for was seen on the three current rebalancing dates vs. 5 reconstitution occasions earlier than Might 2020. Mixed market cap of the 18 MSCI Rising Markets (EM) ETFs listed within the US jumped 34% from USD90.2bn in January 2019 to USD120.7bn in January 2021, however the determine just isn’t sufficient to clarify the heavy web program promoting. We discover no clear correlation between program buying and selling by international buyers and adjustments in Korea’s weight within the MSCI EM Index earlier than/after rebalancing occasions.
Rising influx of funds monitoring MSCI occasions; international capital outflows from Korea
In February 2021, MSCI opened a session round a proposal to make use of extra screening for any potential additions to the Normal Indexes of the MSCI World Investable Market Indexes, which exhibit excessive value improve for an outlined time interval that precedes an MSCI Index Assessment. The variety of new constituents exhibiting exceptionally excessive value returns has gone up since Might 2020. MSCI proposed to postpone the inclusion of shares that meet the factors for excessive value improve, which is outlined extra returns over the MSCI ACWI MIM nation sector imply on the worth cutoff date of a given index assessment 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’s proposal that there was a rising influx of funds monitoring MSCI’s rebalancing occasions since Might 2020, and this will likely clarify heavy web program promoting seen through the three earlier occasions.
There’s yet another factor to think about, which is the connection between cumulative program buying and selling of KOSPI-listed shares by foreigners and MSCI EM-related fund flows. MSCI EM ETFs have seen an influx of funds since September 2020, whereas the KOSPI has been weighed by persevering with program promoting by international buyers. Foreigners are recognized to handle their portfolios based mostly on long-term methods, like high-frequency buying and selling (HFT), market making, and hedge funds. The prolonged short-selling ban in place since 2020 could have triggered international buyers to tug their cash out of Korea.
The prohibition of short-selling was imposed on March 13, 2020 and might be partially lifted for KOSPI 200 and KOSDAQ 150 shares from Might 3, 2021. The ban is eliminated in many of the main nations apart from Korea and Indonesia.
Assuming that the ban has triggered foreigners to promote shares in giant portions on rebalancing dates, the partial resumption of short-selling ought to assist sluggish the outflow of international capital. We have to regulate reconstitution occasions, contemplating the rising affect of international buyers on short-term share costs on the time of MSCI index rebalancing.