Global index provider FTSE has decided to retain Taiwan and South Korea's classification as 'advanced emerging markets.' This means they will not be upgraded for inclusion in FTSE's developed-markets indices and will not, therefore, see a rush of pension funds and other institutional investors, primarily in the UK, to invest in their stock markets.
Similarly, FTSE's equity index committee has decided not to include Chinese A shares into its global equity indices.
These three markets have been on FTSE's watch list for some time, and many portfolio managers believe Korea and Taiwan should be upgraded in the near future, based on the size of their industrialized economies.
David Hobbs, chairman of the equity index committee in London says FTSE is impressed with many improvements in the two markets. "South Korea and Taiwan need to be commended for their tremendous enthusiasm in encouraging change in their markets and for seeking an active dialogue with investors worldwide."
Nonetheless, FTSE believes Taiwan still needs to work on: ensuring it has a free and developed foreign exchange market; simplifying its registration process for foreign investors and improving the process for off-exchange transactions. South Korea needs to: improve its FX market; facilitate off-exchange transactions and allow the easy use of omnibus account facilities by international investors. As for China, it simply has not met the full criteria required to be classified as an emerging market and warrant inclusion in FTSE's indices, says the firm.
These three markets will remain on FTSE's watch list and be assessed in September, 2006. Should FTSE then decide to change any of their status, investors will be given a minimum of six months notice prior to implementing those changes, meaning the soonest Korea or Taiwan could be considered 'developed' by FTSE is March 2007. Portfolio managers closely tracking index benchmarks can breath easy for now.
Other global index providers such as MSCI also consider Taiwan and Korea to be emerging markets, and do not include A shares in their emerging-market indices.