Global index provider FTSE Group has upgraded Korea to developed from emerging market status. MSCI is in the process of considering a similar upgrade and is expected to make its decision known by June 2009.

Korea joins FTSEÆs developed market indices in September 2009, and if all goes well it will join MSCIÆs in November of next year.

Merrill Lynch estimates net buying of $16 billion of Korean equities by passive funds as a result of the FTSE upgrade. FTSE estimates that around $3 trillion of assets are benchmarked against its indices, and Merrill Lynch estimates that one-third of that total is benchmarked against indices that will be affected by KoreaÆs upgrade.

KoreaÆs new weight in the FTSE developed market index will be around 1.6% (versus an old weight of 14.5% in the FTSE emerging market index), Merrill Lynch says. KoreaÆs equivalent weight in the MSCI indices would be 1.4% and 13.0%, respectively, it adds.

To give an indication of whatÆs in store for Korea, Merrill Lynch notes that the Israeli market outperformed for the six weeks after its own FTSE upgrade last year, rising 15% in US dollar terms and outperforming MSCI Europe, Middle East, and Africa (EMEA) by more than 270 basis points in the following six weeks.

ôAll other things being equal, the FTSE upgrade is positive for Korea, but the upgrade is very unlikely to be a dominant catalyst in the current period and there is limited evidence to suggest developed market status leads to an immediate re-rating for smaller markets,ö says Michael Hartnett, New York-based chief emerging markets equity strategist at Merrill Lynch.

Having developed market status typically leads to a more stable level of international investments. Investors that allocate based on indices tend to earmark around 30% of their portfolios to developed markets. Large pension funds worldwide tend to prefer investing in developed markets.

Emerging markets, meanwhile, tend to be the territory of active fund managers, who increase or decrease their investments in a market or a company depending on their current view and outlook. Thus, fund flows tend to be more volatile compared with developed markets.

Korea was placed by FTSE on the watch list for possible upgrade to developed market status in 2005. The last hurdles Korea overcame to be granted developed status by FTSE involved three requirements: a free and well-developed foreign exchange market, free delivery settlement, and off-exchange transactions.