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Speaker 1: South Korea's one point eight trillion dollars stock market is

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Speaker 1: one of the biggest in Asia. Korea is also home

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Speaker 1: to more global conglomerates than Hong Kong think of giants

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Speaker 1: like Samsung and Hyundai. The country has higher purchasing power

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Speaker 1: than Japan or Spain, and yet by one influential measuring stick,

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Speaker 1: Korea is still designated as an emerging market, not a

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Speaker 1: developed one. That measuring stick is a market index. An

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Speaker 1: index is a way of tracking how a market is performing.

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Speaker 1: Firms that create indexes select a number of, say company

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Speaker 1: stocks that they believe are a good representation of a market,

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Speaker 1: and then they track how those stocks perform together as

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Speaker 1: a group. Two examples of indexes you might be familiar

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Speaker 1: with the S and P five hundred and the Dow

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Speaker 1: Jones Industrial Average. They group some of the biggest US companies,

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Speaker 1: and they're often considered a bot barometer for the stock

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Speaker 1: market overall. Influential indexes like the SMP five hundred are

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Speaker 1: closely watched by investment firms and fund managers. Those are

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Speaker 1: the people often making decisions about the stocks in your

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Speaker 1: pension or four to oh one k It's one way

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Speaker 1: they figure out what stocks to buy and sell. So

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Speaker 1: what does this all have to do with Korea? There

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Speaker 1: are other kinds of indexes, and one of the most

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Speaker 1: influential is provided by the investment research firm MSCI. It

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Speaker 1: puts together indexes that try to take the temperature not

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Speaker 1: just the companies, but whole markets around the world. An

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Speaker 1: MSCI list Korea in its Emerging Markets index that includes Brazil, China,

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Speaker 1: and Mexico, among other developing economies. Korea, though, wants to

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Speaker 1: be bumped up to msci's prestigious World Index of Developed Markets,

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Speaker 1: where it would sit alongside the US, UK, Germany and

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Speaker 1: other economic powers. We're talking about this now because MSI

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Speaker 1: is expected to decide this month whether to give South

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Speaker 1: Korea what it wants. But Bloomberg reporters Yuk Young Lee

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Speaker 1: and Soul and Henry Wren in London wondered would making

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Speaker 1: that leave actually be worth it. I'm wes Kosova today,

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Speaker 1: I'm the big tig Why South Korea is looking to

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Speaker 1: go big? You can you start by just painting a

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Speaker 1: picture for us of South Korea's economy.

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Speaker 2: So South Korea has right now Asia's fourth largest economist

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Speaker 2: and it's economic growth for the past century has been

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Speaker 2: astounding a story of fast economic growth is the envy

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Speaker 2: of the lot of developing countries and emerging Marcus and

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Speaker 2: it's one of the richest and it's m and by

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Speaker 2: some standards, richer than its neighbors such as Japan. It

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Speaker 2: has more purchasing power than Japan, for example, and the

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Speaker 2: country has a lot of developed market features. If you

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Speaker 2: want to see how your Asian stocks did overnight, a

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Speaker 2: lot of fund manager uses this Asian stock index developed

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Speaker 2: by MSCI, and it's MSCI who decides which stocks goes

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Speaker 2: to this index, which stocks get drapped from the index,

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Speaker 2: and based on this decision, a lot of money moves

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Speaker 2: in and out of certain stocks.

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Speaker 3: So it's really important.

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Speaker 2: I think we also want to show the breakdowns of

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Speaker 2: this MSCI market classification that we're talking about today. So

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Speaker 2: the biggest league, the so called the Big League is

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Speaker 2: called the MSCI World Index, is consisting of twenty three

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Speaker 2: developed markets, including the US, Canada, France, UK, Israel which

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Speaker 2: joined in twenty ten. And there is this smaller league

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Speaker 2: called Emerging Market Index, and this is where South Korea

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Speaker 2: belongs to. And the biggest member of this emerging market

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Speaker 2: in dex is China, The next one is Taiwan, and

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Speaker 2: then there's India and South Korea is the fourth largest member.

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Speaker 2: There are the members such as the Philippines, Malaysia, Turkey,

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Speaker 2: Mexico as well, and there is also even smaller pond

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Speaker 2: called frontier market. There's the country like Kenya island that

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Speaker 2: belongs to the frontier markets. This is how MSCI divided

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Speaker 2: the world into.

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Speaker 1: In the frontier market, how do is that different from

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Speaker 1: an emerging market?

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Speaker 4: So emerging markets have greater growth rates, but however, some

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Speaker 4: frontier markets also seeing very fast booming economy as well.

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Speaker 4: But eclomy sites tend to be a bit smaller, even

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Speaker 4: smaller compared with developing ones and also developed ones, and

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Speaker 4: according to MSCI standards, the frontier markets should also probably

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Speaker 4: have less liquidity in terms of equities trading, but also

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Speaker 4: less accessible to foreign investors as well.

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Speaker 1: How does MSCI decide which countries are eligible to be

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Speaker 1: in an emerging market index and which ones go into

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Speaker 1: an index that represents more advanced economies.

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Speaker 2: MSCI uses three big criteria when they decide which countries

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Speaker 2: goes to the which list. So three of that criteria

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Speaker 2: includes the size and development of the economy. The second

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Speaker 2: one is the liquidity of the equity trading, so how

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Speaker 2: liquid a market is. And the third one, which is

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Speaker 2: very unique for MSCI, is the market accessibility. It tries

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Speaker 2: to measure how easy it is for foreign investors to

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Speaker 2: access to buy and sell, and to get information about

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Speaker 2: certain stuffs that belong to the certain countries. So when

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Speaker 2: all these three criteria means, that's when MSCI grants a

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Speaker 2: certain market a developed market status.

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Speaker 4: Let's first talk about whether the economy is developed enough.

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Speaker 4: So for Korea this is not an issue because as

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Speaker 4: you can mention careers, basically a country in some standards

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Speaker 4: as rich as Japan or France or Italy and Europe.

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Speaker 4: So basically it's not an issue. But for the second point,

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Speaker 4: it's the size of the market and the market liquidity,

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Speaker 4: which is also not an issue because you know, in

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Speaker 4: Korea we have these big listed companies for example, just

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Speaker 4: to name a few, like Samsung, LGCM or Hundiokia like

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Speaker 4: these are big enough companies that's very actively traded by

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Speaker 4: local Koreans but also by foreign investors. So the second

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Speaker 4: point is not an issue as well. The market accessibility

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Speaker 4: is really an issue here, so there are a few

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Speaker 4: things out sticking out there. First is the currency trading

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Speaker 4: hours we just mentioned, so basically the career is only

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Speaker 4: trading its currencies in its career market hours, which is

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Speaker 4: an issue. So basically hinders the foreign investors' efforts to

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Speaker 4: transfer their assets between Korean assets as well as foreign assets.

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Speaker 4: So that has been an issue that MSCI asks Korea

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Speaker 4: to address. There are some other issues as well, for example,

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Speaker 4: making it easier for foreign investors to register in Korea,

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Speaker 4: making sure that every company is disclosing their financials in English,

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Speaker 4: or making their dividend payment communications more transparent. There are

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Speaker 4: some other small sticking points as well. So these are

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Speaker 4: the things that really MSCI wants Career to address.

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Speaker 1: And I should say that MSCI declined to comment on

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Speaker 1: Bloomberg story. You're young. Many of our listeners are in

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Speaker 1: the US or in Europe. How will this affect people

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Speaker 1: beyond Asia and beyond the machinations of financial markets?

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Speaker 2: American citizens they put in pension and these pension money

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Speaker 2: gets allocated between developed market, emerging markets and frontier market

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Speaker 2: and other stocks. So when South Korea leaves the Emerging

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Speaker 2: Market index, these funds that allocate their money into emerging

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Speaker 2: market funds will see more investment going into China. So

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Speaker 2: that's how one way that American investors can be affected.

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Speaker 2: South Korea's departure from the Emerging market indust could make

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Speaker 2: China be more dominant in the Emerging market index. Your

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Speaker 2: pension money, you can't really ignore emerging market when you

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Speaker 2: invest a huge part of money. Each pension or each

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Speaker 2: fund has different mandates in terms of how much money

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Speaker 2: they allocate to certain parts. But if you're in a

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Speaker 2: big part of the pension funds or big part of

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Speaker 2: the top ETF funds, then there are many funds that

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Speaker 2: have to invest in the emerging market funds because you

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Speaker 2: can't really ignore how fast they're growing. This is the

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Speaker 2: market where the big population growth is coming, big economic

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Speaker 2: growth is coming. And sometimes depending on the years, emerging

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Speaker 2: markets thought market may perform a lot better to development market,

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Speaker 2: and if you are fund managers, you don't want to

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Speaker 2: miss that.

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Speaker 4: Korea's entry into developed market indecks will have unintended consequence

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Speaker 4: for investors that are investing in China assets. So when

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Speaker 4: we think about it, currently, China is the biggest component

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Speaker 4: for mscis emerging market indecks. It's one third of msci's

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Speaker 4: Emerging Market INDECKS, but Korea, as we know, it's the

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Speaker 4: fourth largest component. It's a significant exposure in the index.

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Speaker 4: But after Carea's departure, China will actually occupy close to

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Speaker 4: half of that benchmark, which makes some investors nervous because

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Speaker 4: it's half of the exposure to China and making the

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Speaker 4: index probably less democratic compared with before with Career's departure.

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Speaker 4: And at the same time, investors have already been nervous

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Speaker 4: about allocating this much exposure to China because of first

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Speaker 4: US China relationships and second the slowing economic recovery currently

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Speaker 4: here in China as well, and also in the long term,

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Speaker 4: China also have demographic issues kind of similar story with

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Speaker 4: Korea as well. So these are the issues that could

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Speaker 4: make investors nervous when when it comes to investing in

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Speaker 4: China in the long term.

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Speaker 1: After the break. Why is Korea so determined to make

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Speaker 1: this leap? Young? South Korea very much wants to jump

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Speaker 1: up into MCSI's World Index. Why is it so important

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Speaker 1: to them to make that switch?

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Speaker 2: The stamp the MSCI grants as a developed market to

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Speaker 2: South Korea could be a big boost to the national pride.

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Speaker 2: And then there's this issue of the country's economic growth. Thus,

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Speaker 2: Korea's economy is slowing, and it's because the country's population

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Speaker 2: is shrinking and it's also aging.

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Speaker 3: The country has the.

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Speaker 2: World's lowest birthrate for more than decades, so the country

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Speaker 2: needs more foreign participants from overseas in the stock market

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Speaker 2: in order to help boost the slowing economy. Then there's

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Speaker 2: this growing number of mom and pop stock investor whose

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Speaker 2: number have more than double during the pandemic, and they're

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Speaker 2: a very important part of the voting block for the

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Speaker 2: current administration and for politicians, and having more foreign participant

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Speaker 2: for the country's stock market could be a big boost to.

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Speaker 3: This mom and pop stock investor.

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Speaker 2: And finally, we could probably say that the MSc upgrade

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Speaker 2: could be a big political win for the current government

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Speaker 2: because the retail investor are such a big part of

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Speaker 2: the voting blog and they played a very important role

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Speaker 2: during the presidential elections last year. Current Sales, current president

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Speaker 2: and other presential candidates have been promising that MSCA upgrade

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Speaker 2: and a lot of these captive reform measures that will

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Speaker 2: benefit the current stock market investors. So they were trying

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Speaker 2: to appeal to this growing and active retail investors. If

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Speaker 2: the MSCI upgrades South Korea to develop market, then it

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Speaker 2: will definitely be something that the current government would help

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Speaker 2: as a big accomplishment.

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Speaker 1: Yu Keng, you mentioned mom and pop investors, What exactly

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Speaker 1: do you mean?

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Speaker 2: So there are real mom and pop mother and father

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Speaker 2: investors and the young stock investors in their twenties that

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Speaker 2: are putting their money instead of in the savings account

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Speaker 2: investing in stocks Korean stocks, US stocks in order to

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Speaker 2: bring quick wealth, and that number has grown huge during

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Speaker 2: the pandemic. There were I think now about a third

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Speaker 2: of the population invest in country's stock market. And this

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Speaker 2: is the country with fifteen million popular and there's more

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Speaker 2: than forteen million populations who are actually participating in buying stocks,

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Speaker 2: and they are the ones who could get the benefit

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Speaker 2: if the MSCA upgrades South Korean stock market and bring

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Speaker 2: more foreign investments.

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Speaker 1: So now we come to the big question. Henry explained

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Speaker 1: why Korea believes this bump up to the world indeck,

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Speaker 1: we'd give it such a boost.

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Speaker 4: Starting back from square one, let's take a look at

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Speaker 4: what happened if MSCI says Korea is now a developed

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Speaker 4: market instead of an emerging market. So that basically means

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Speaker 4: MSCI will remove carea from the MSCI Emerging Market indecks

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Speaker 4: and at Korea into the MSCI Word Index or Developed

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Speaker 4: Market indecks right now, which currently tracks twenty three developed markets,

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Speaker 4: but pending Career's entry, there will be twenty four. So

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Speaker 4: this change, that will mean these emerging market investors there

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Speaker 4: will pull money outside of Korea because the index tracking

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Speaker 4: so MSCI Emerging Market indecks is no longer having career anymore.

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Speaker 4: But at the same time, these investors, bigger global funds,

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Speaker 4: bigger global investors that they track MSCI word indecks or

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Speaker 4: the mscis Developed Market in decks, they will allocate some

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Speaker 4: of their assets into the career stock market because MSCI

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Speaker 4: now has career in the MSCI word indecks. So you

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Speaker 4: see there are ins and outs here, but the hope

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Speaker 4: is there will be more inflows and outflows simply because

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Speaker 4: the MSCI word indecks is tracked by more fund managers,

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Speaker 4: tracked by bigger global funds, So basically because the poor

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Speaker 4: is bigger, so there will be benefits for career. If

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Speaker 4: career is elected in the word indecks.

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Speaker 1: Your young inflows and outflows. Could you give a sort

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Speaker 1: of lay explanation of what that is.

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Speaker 2: So foreign inflows mean that there are more overseas investors

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Speaker 2: buying Korean stocks then there are selling the stock, so

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Speaker 2: they are buying more Korean stocks than selling the Korean stock.

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Speaker 2: So that means a plus for the stock market in

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Speaker 2: South Korea.

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Speaker 1: You kelling if this were to happen, what companies would

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Speaker 1: really stand to benefit most from this?

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Speaker 2: South Korea accounts for about twelve percent of the current

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Speaker 2: emerging market benchmark, whereas if it gets upgradd it will

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Speaker 2: be just one or two percent of the developed market benchmark.

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Speaker 2: So that means a lot of smaller or medium sized

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Speaker 2: companies will see foreign investors selling their stocks, whereas the

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Speaker 2: big company, the biggest one is STAMS Electronics, the second

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Speaker 2: big one is the Lgae Energy Solution. Those companies will

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Speaker 2: likely to see more foreign investors buying their stocks, so

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Speaker 2: it will be more beneficial to big companies, whereas we

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Speaker 2: might see some negative impact on the smaller firms.

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Speaker 4: When we think about this, that means, as you co mentioned,

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Speaker 4: Korea is the fourth biggest component in the MSCI emerging

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Speaker 4: market right now, you can imagine it as a big

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Speaker 4: fish in a small pond, but when it moved to

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Speaker 4: the MCR word indecks, it's actually a bigger pond. But

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Speaker 4: Carea is now a smaller fish because it only occupies

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Speaker 4: one or two percent of weight. So when fund managers

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Speaker 4: allocate their money to MASH the benchmark weight, which is

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Speaker 4: one or two percent, it doesn't necessarily mean that these

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Speaker 4: smaller companies are not included in the MSCR word indecks.

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Speaker 4: But for foreign fund managers to match that one or

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Speaker 4: two percent weight, the only thing they need to do

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Speaker 4: is to buy the biggest stocks to gain exposure to Korea,

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Speaker 4: be it Samsun Electronics or be it LG cam Moor,

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Speaker 4: Hyundai or Kia, So that's all they need to do.

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Speaker 4: So probably for these bigger investors, the less interest level

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Speaker 4: compared with current emerging market fund managers when it comes

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Speaker 4: to smaller financial stocks or let's say smaller industrial stocks.

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Speaker 4: So that's probably a DRAWBF Koreas entering the developed market

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Speaker 4: and exiting the Merging Market Index for.

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Speaker 1: MCI, when we come back, will Korea get its wish

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Speaker 1: and if so, when.

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Speaker 2: So?

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Speaker 1: We've heard about one possible downside of this move that

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Speaker 1: Korea wants to make and Yuke Young and Henry say

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Speaker 1: there are other potential drawbacks too, So what.

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Speaker 2: We found out from our reporting is that they're actually

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Speaker 2: hidden risk. In MSCI upgrade of South Korea to the

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Speaker 2: developed market, foreign investors might sell more Korean companies than

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Speaker 2: buying Korean companies, as was initially expected by the South

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Speaker 2: Korean government, But in fact, what we found out is

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Speaker 2: that actually more foreign investor will sell the company in Korea,

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Speaker 2: which means that the shareholder pool will be more concentrated

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Speaker 2: because on Korean retail investors or Korean funds that invest

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Speaker 2: in Korean companies with less foreign participation. This could especially

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Speaker 2: be the case for the smaller and medium sized companies

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Speaker 2: in South Korea if the MSCA upgrades, So stock market

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Speaker 2: benefits more when there are ten more investors than just

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Speaker 2: one or two, because you have more people you could

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Speaker 2: sell at a higher price.

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Speaker 3: So what people.

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Speaker 2: Expect right now in the event of MSA upgrade is

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Speaker 2: that if South Korea becomes a developed market, then there

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Speaker 2: will be let's say, one hundred investors instead of like

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Speaker 2: twenty investors trying to compete to buy one South Korean stock.

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Speaker 2: But what we found out is that actually there may

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Speaker 2: be fewer investors trying to buy Korean stocks, So instead

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Speaker 2: of going from ten to hundred investors trying to buy

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Speaker 2: one Korean stock, we may go down from one hundred

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Speaker 2: to fifty or even fewer. So instead of having American

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Speaker 2: investors European investors trying to buy more Korean style, we

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Speaker 2: may just end up having just Korean investors competing for

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Speaker 2: the Korean stock. That's not a good news for the

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Speaker 2: stock market investors who are trying to sell their stocks

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Speaker 2: at a higher price. So that's why this is a

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Speaker 2: drawback for the Korean stock market.

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Speaker 1: And what would the effect of this be on Korea's economy.

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Speaker 2: So South Korea's population is shrinking and the country's population

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Speaker 2: is also aging. That means we may not have as

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Speaker 2: many retail investors twenty years from now, thirty years from

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Speaker 2: now because we're not having many babies now.

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Speaker 3: South Korea has the worst lowest birth.

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Speaker 2: Rates, so the country needs like better immigration policy and

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Speaker 2: many other policy in order to help this slowing economy.

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Speaker 2: But having more foreign investors participating joining the stock market

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Speaker 2: to buy more Korean firms could help counter that shrinking

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Speaker 2: population effect. The Korean companies they roll their business by

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Speaker 2: financing their money through the stock market, by raising their

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Speaker 2: money through stock market, and they need more investors who

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Speaker 2: are willing to pay their money out of their pocket

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Speaker 2: and help these Korean companies to finance their investment and

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Speaker 2: their future businesses. We may not be able to have

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Speaker 2: that from Korean retail investors or Korea's big company investor,

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Speaker 2: but we may be able to have that from the

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Speaker 2: foreign investors.

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Speaker 3: If the country is upgraded to MSCI.

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Speaker 1: Markets don't often make that leap from the smaller pund

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Speaker 1: to the larger pan When was the last time it happened.

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Speaker 4: It's Israel in twenty ten.

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Speaker 1: And how did they do? We're looking at how this

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Speaker 1: could affect Korea and its economy investors. What did Israel

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Speaker 1: see when they made the jump?

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Speaker 4: Okay, I think Israel is really good example showing why

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Speaker 4: an MSCI upgrade is not a silver bullet for the

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Speaker 4: local stock market. And there are lots of problems still

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Speaker 4: remains in the Israel market so remains to be addressed.

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Speaker 4: Even after the upgrade. The country struggle to attract any

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Speaker 4: foreign investors investing in the local stock market. The local

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Speaker 4: market also struggles to retain those most advanced companies, those

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Speaker 4: most innovative companies to list in local stock exchange. Instead,

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Speaker 4: these companies would seek foreign exchanges, so for example, Nastac

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Speaker 4: or New York Stock Exchange to list their companies. So

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Speaker 4: why It's because the local market is still not advanced

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Speaker 4: of the local market is still struggling to attract foreign investors.

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Speaker 4: So when looking back, actually an upgrade for Israel to

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Speaker 4: the MSCI Developed market is not a blessing for the

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Speaker 4: local stock market because it's still struggle to retain its company.

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Speaker 4: It's still struggle to retain foreign capitals. So that's actually

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Speaker 4: an example showing you why it's not necessarily the good case.

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Speaker 4: Korea as an economy is much bigger than Israel's, so

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Speaker 4: the lessons could be different. But the key takeaway for

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Speaker 4: Israel's upgrade is first it won't ground to immediate fortune

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Speaker 4: after MSCI upgrade, and second, the local stock market needs

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Speaker 4: to do more, needs to improve transparency, needs to prove

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Speaker 4: for the companies, they themselves need to prove shareholder returns

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Speaker 4: before they can attract more foreign investors buy into their stocks.

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Speaker 1: So, Henry, is this a case of the short term

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Speaker 1: pain of making this switch is worth it in the

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Speaker 1: long run.

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Speaker 4: When you think about the short term pain, so that

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Speaker 4: would be these smaller companies at risk of losing out

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Speaker 4: because of these global investors they tend to ignore these

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Speaker 4: smaller firms but buying bigger firms. But it really depends, right,

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Speaker 4: So you would argue that probably it's worth it because

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Speaker 4: it's definitely a step forward for the Korean market. So

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Speaker 4: that's a recognition of the side of the economy, the

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Speaker 4: advanced status of Korean's economy, but also as well, Korean

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Speaker 4: must improve its market accessibility before MSCI to consider any

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Speaker 4: upgrade to develop market status. So in the long run,

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Speaker 4: you can make a case that this is probably a

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Speaker 4: good thing for the Korean companies because they need to

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Speaker 4: do more and because they're leaping forward from a smaller

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Speaker 4: pund to a bigger pund so they're kind of forced

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Speaker 4: to do more. They are kind of having this incentive

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Speaker 4: to achieve bigger things.

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Speaker 1: You're young. A lot of people, as you say, are

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Speaker 1: waiting for this decision from MSCI. Where does it go

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Speaker 1: from here? When does that decision come?

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Speaker 2: So MSCI announces this decision and market classification once a

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Speaker 2: year every June, and at the end of June, it

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Speaker 2: will announce which market belongs to the Developed List, Emerging

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Speaker 2: Markets List, and Frontier Market List. A lot of fund managers,

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Speaker 2: including Goldman Socks, expect that South Korea would be placed

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Speaker 2: in the watch list of Developed market. You have to

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Speaker 2: be in the watch list for at least one year

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Speaker 2: before you get the final upgrade, and that system is

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Speaker 2: existing because MSCI doesn't want to surprise markets. It wants

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Speaker 2: to give enough time for fund managers to prepare before

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Speaker 2: the final change comes. And if MSCI announces that decision

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Speaker 2: in June and say South Korea will be placed on

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Speaker 2: the watch list for the developed market, that will be

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Speaker 2: a huge deal for the country, and the Goldman Socks

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Speaker 2: is the one that's expecting that it will happen this year. However,

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Speaker 2: there are also other fund managers who expect that happening

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Speaker 2: a little later, possibly next year or maybe even the

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Speaker 2: year after. But the consensus that we see emerging from

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Speaker 2: a lot of these people is that is going to

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Speaker 2: happen in coming years.

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Speaker 4: That we talked to think that Korea is definitely on

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Speaker 4: the right path and Korea is on track to be

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Speaker 4: added to at least the Developed Market watch list by MCI.

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Speaker 4: Sometime down the road. But it can stay for one year,

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Speaker 4: it can stay for longer. There's no guarantee because Korea

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Speaker 4: was added to the watch list in two thousand and eight. However,

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Speaker 4: the attempt was a failure because in twenty fourteen MSc

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Speaker 4: I put it career outside of the watch list. So

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Speaker 4: it really depends. So the story is unfinished.

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Speaker 1: Henry, you Young, Thanks so much for talking with me today.

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Speaker 3: Thank you so much for having us.

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Speaker 1: Thanks for listening to us here at The Big Take.

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