Synopsis

South Korea's stock market is nearing a significant milestone. Investors are watching for a potential upgrade to developed-market status by MSCI. The Kospi has seen a massive surge this year, fueled by artificial intelligence stocks. While volatility is high, reforms are underway.

After one of its most volatile weeks in years, South Korea's stock market is approaching a milestone it has long been chasing: a potential path into MSCI Inc's developed-market status.

The Kospi has become the world's best-performing major equity benchmark this year, surging more than 90% as investors piled into artificial-intelligence winners. Yet the rally has also turned Korea into one of the world's most volatile stock markets. The benchmark has repeatedly triggered exchange safeguards in recent days, while swings have surged to levels rarely seen among major global indexes.

Now investors are awaiting MSCI's annual market-classification review on June 23, when the index provider will decide whether Korea finally earns a place on the watchlist for developed-market status, the first step toward an eventual upgrade.

Most of the 15 investors and strategists interviewed by Bloomberg expect MSCI to keep Korea in the emerging-market camp for now, arguing that recent reforms need more time to prove their durability. But few doubt the direction. "It's more of a matter-of-time issue," said Young Jae Lee, senior investment manager at Pictet Asset Management. "Korea will become a developed market at least in the next couple of years. That's my base case."

The bigger question may be how much the label matters anymore.

Korea's market has become synonymous with the global AI trade, with Samsung Electronics and SK Hynix accounting for more than half of the Kospi's weighting. As investors chase exposure to the semiconductor boom, some argue the forces driving Korean stocks are becoming larger than any benchmark classification.

"It doesn't matter in a sense that Korea is now such a global play," said Arjun Jayaraman, portfolio manager at Causeway Capital Management. "It's not about investing in Korea. It's about investing in AI plays."

By traditional measures, Korea already looks like a developed market. The nation's equity market has tripled in value over the past year to about $4.4 trillion, briefly overtaking India as the world's sixth-largest. Its companies occupy critical positions in global semiconductor, battery and manufacturing supply chains.

A country with Korea's massive footprint shifting classification is "unprecedented," said Chetan Seth, Asia equity strategist at Nomura Holdings in Singapore. "No other country in recent times with Korea's weight in existing indices has moved from one market classification to another."

South Korea currently commands a 23% weighting in the MSCI Emerging Markets index. By comparison, Greece and Israel, the two most recent nations to achieve developed-market status, boasted much smaller economies and index weights when they were promoted. The sticking point has long been accessibility for foreign investors. MSCI removed Korea from its developed-market watchlist in 2014, citing restrictions on currency trading and other market-access issues. Last year, the index provider again pointed to shortcomings in foreign-exchange reforms and compliance burdens. Since then, Korea has resumed short selling and is preparing to launch extended won trading hours in July, two reforms long sought by global investors. President Lee Jae Myung has also made capital-market reform a key policy priority.

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