LG Innotek added to MSCI Korea index, with up to W439b in passive inflows expected

LG Innotek has been added to the MSCI Korea index, with brokerage estimates pointing to passive fund inflows of between 78.5 billion won ($55.5 million) and as much as 439 billion won. The quarterly review resulted in one addition and four removals, trimming the number of constituents in the MSCI Korea index to 74.

MSCI announced Thursday that LG Innotek would join the index as part of its August quarterly review. The four stocks removed are HLB, LG Display, POSCO International and Samsung Epis Holdings. The rebalancing will take effect after the market close on Aug. 31.

The MSCI Korea index tracks large- and mid-cap domestic stocks and adjusts its constituents in February, May, August and November each year based on total market capitalization and the float-adjusted market cap available to foreign investors. Because overseas ETFs and passive funds tracking the index rebalance their holdings accordingly, additions and removals can cause sharp swings in individual stock prices and trading flows.

Market attention is focused on the scale of passive inflows expected for newly added LG Innotek, with brokerage estimates ranging from 78.5 billion won to as much as 439 billion won. Kyobo Securities estimated that roughly 78.5 billion won in foreign capital would flow into LG Innotek, basing its projection on foreign net purchases observed in the four most recent quarterly reviews and the stock's float-adjusted market capitalization.

Eugene Investment & Securities put its estimate of index-tracking fund purchases tied to the LG Innotek addition at 439 billion won — roughly 2.3 times the stock's average daily trading value of 194 billion won. Samsung Securities also forecast passive buying demand of 313 billion won from the inclusion.

Brokerages had already assigned a high probability to LG Innotek's inclusion ahead of the review. Eugene Investment & Securities estimated the market capitalization threshold for inclusion at around 13 trillion won and the float-adjusted market cap threshold at around 4.4 trillion won, placing the odds of LG Innotek's addition at 60 to 70 percent. MSCI selects one trading day at random from the final 10 sessions of the month preceding each quarterly review and uses that day's market capitalization figures to determine additions and removals.

In the May quarterly review, no new stocks were added while Hanjin Kal, HD Hyundai Marine Solution and SK Biopharm were removed, cutting the number of MSCI Korea constituents from 80 to 77. This review adds one stock but removes four, bringing the total down further to 74.

However, analysts caution against chasing LG Innotek shares after the inclusion announcement in hopes of riding further gains. Expectations of inflows tied to an addition tend to be priced into the stock well before the official announcement.

According to Eugene Investment & Securities, stocks newly added to the MSCI index since 2020 rose an average of 24.7 percent in the 45 days leading up to the announcement date, outperforming the Kospi by 21.4 percentage points over the same period. By contrast, the average return on the announcement day itself was minus 0.1 percent, and the average return from the announcement date through the actual inclusion date was 3.5 percent.

"Returns on the announcement day are generally negative, which means chasing the stock after the announcement has offered little practical benefit," said Kang Song-cheol, a researcher at Eugene Investment & Securities.