[Edaily Reporter PARK MIN ] With less than ten days remaining until the announcement of Morgan Stanley Capital International’s (MSCI) August regular review—which dictates the flow of global passive (index-tracking) funds—attention is focused on whether supply-and-demand-driven events will occur even amid “unprecedented market volatility.” In the past, stocks expected to be added to or removed from the MSCI index tended to show a clear upward trend even before the announcement, but due to the recent sharp declines in the index and severe volatility, they have yet to show any significant movement.

◇MSCI’s Regular Review to Be Announced on the 13th… “LG Innotek Likely to Be Added”

According to the securities industry on the 4th, MSCI is scheduled to announce its regular review in the early hours of the 13th (KST). The MSCI Index, one of the world’s most influential stock indices, conducts index rebalancing four times a year—in February, May, August, and November. When a stock is included in the MSCI Index, passive funds tracking the index buy shares in proportion to the stock’s weighting; conversely, when a stock is excluded, selling pressure is likely to emerge, making it a catalyst for “supply-and-demand events.”

MSCI selects a random day from the last 10 trading days of the month immediately preceding the review announcement and performs the rebalancing (asset adjustment) based on the stock prices (market capitalization and free-float market capitalization) on that day. The structure is such that inclusion and exclusion are determined based on two criteria: market capitalization and free-float market capitalization. In the previous review last May, three stocks— HANJINKAL(180640), HD HYUNDAI MARINE SOLUTION CO., LTD(443060), and SK BIOPHARMACEUTICALS(326030) —were excluded, while no new stocks were added. As a result, the number of constituents in the MSCI Korea Index has decreased from 80 to 77.

Industry observers estimate that the cutoff thresholds for inclusion and exclusion in this August’s regular review are a market capitalization of around 10 trillion to 13 trillion won and a free-float market capitalization of around 3 trillion to 4 trillion won.

Kang Song-cheol, an analyst at EUGENE INVESTMENT & SECURITIES, said, “We estimate that the market capitalization threshold for inclusion in the MSCI index is 13 trillion won, and the free-float market capitalization threshold is around 4.4 trillion won.” Jeong Sang-hwi, a senior researcher at KYOBOSECURITIESCO.,LTD., also said, “Reflecting the sharp stock market decline and the weak dollar since mid-July, we project the MSCI cutoff criteria to be 10.2 trillion won for market capitalization—lower than in previous years—and 3.4 trillion won for free-float market capitalization.”

Based on these projections, the securities industry anticipates that the following stocks are likely to be included in the August review: LG Innotek(011070), while the following are expected to be excluded: HLB INC.(028300). From July 20 to 31—the calculation period for this rebalancing—LG Innotek’s closing price (based on the KRX) ranged from 424,000 to 679,000 won, and its market capitalization fluctuated between 10.0349 trillion and 16.07 trillion won. During the same period, HLB INC.’s closing price ranged from 28,300 to 31,300 won, and its market capitalization ranged from 3.7695 trillion to 4.1891 trillion won.

In addition, LS(006260), #SamsungE&A, #LG CNS, and HyundaiAutoever(307950) are being cited as potential candidates for inclusion in the MSCI index. On the other hand, LG Display(034220), POSCO INTERNATIONAL(047050), and #SAMSUNG EPIS HOLDINGS are expected to be excluded.

◇No Sign of MSCI ‘Supply-Demand Expectations’ Amid Rollercoaster Market

The issue is that during the last 10 trading days of July (July 20–30), the KOSPI index experienced sharp daily swings of over 10%, leading to increased stock price volatility and, consequently, greater uncertainty regarding which stocks will be added or removed. As a result, the supply-and-demand activity that typically builds up ahead of past announcement dates has effectively stalled.

In fact, LG Innotek—considered a strong candidate for inclusion—closed at 525,000 won today, up 2.34% from the previous day’s closing price. Conversely, HLB INC., which is highly likely to be excluded, closed at 34,350 won, up 11.75%. This price movement is quite different from what one would expect based on anticipation of MSCI inclusion or exclusion.

Looking at previous MSCI regular revisions, newly included stocks have clearly tended to show strength even before the announcement. According to EUGENE INVESTMENT & SECURITIES, from 2020 through this year, newly included stocks rose an average of 24.7% from 45 days before the announcement until the announcement date. During the same period, they recorded a return 21.4% higher than the KOSPI index.

However, the average return on the day of the announcement was a mere -0.1%, and the average increase from the announcement date to the actual inclusion date was 3.5%—lower than the pre-announcement level. In other words, buying pressure typically surges ahead of the announcement in anticipation of passive fund inflows tracking the index, but the upward momentum tends to slow down on the day of the announcement itself due to the “exhaustion of catalysts.”

A securities industry official stated, “MSCI determines which stocks to include or exclude based on the market capitalization on a randomly selected day from the last 10 trading days of the previous month. However, in a situation where market volatility is extremely high, as it has been recently, the outlook for inclusions and exclusions is inevitably subject to significant uncertainty.” The official added, “In particular, if the volatile market conditions seen in July—where it is difficult to predict the direction of stock prices—continue into August, it may be difficult to anticipate supply-and-demand-driven market movements.”