According to Remy Briand, MSCI managing director and head of index research, the two countries, despite having been on the review list for a number of years, have not shown any significant progress on a number of issues of concern to investors.
Briand said: “They [South Korea and Taiwan] qualify on a lot of points, but there hasn’t been sufficient movement to remove the remaining constraints to international investors.”
“Both indices may be added to the list again as soon as there are meaningful improvements, but the decision to take them off the list removes uncertainty for the moment,” he added.
According to the press release issued overnight, MSCI said of Korea: “There has been a lack of meaningful developments over the past four years with respect to the two accessibility issues highlighted by international institutional investors: the limited convertibility of the Korean won and the resulting downstream operational inconveniences resulting from the rigidity of the ID system,” it said.
With regards to Taiwan, the issues preventing MSCI from reclassifying it as a developed market continue to be: “a) the absence of an offshore currency market for the New Taiwan Dollar, b) the continued existence of prefunding practices in the Taiwanese equity market and c) the rigidity of the ID system that makes the use of inkind transfers and offexchange transactions difficult to execute in practice.”
The other main determination to come out of the annual review was MSCI’s decision not to include China A-shares in its emerging market index.
While it will remain on the review list for inclusion in 2015, MSCI said there are currently a number of investability constraints linked to the QFII and RQFII quota systems that are still to be resolved.
But, it said, because of the size of the market, the possibility of further regulatory reforms and other changes like the implementation of the Shanghai/Hong Kong stock connect program, the index provider said it remains important to continue to engage with international investors on the potential inclusion of China A-shares in the EM index.
To this end, MSCI said, it will introduce a MSCI China A International Index by June 27, 2014 in order to provide additional tools for investors already investing in the China A-shares market.
Constructed using the group’s global investable market index methodology, MSCI said: “This index and the associated regional and global combinations can be used as benchmarks by global investors with QFII and RQFII allocations to complement the already extensive series of MSCI China A-indices.”