South Korea Biggest Stock May See More Pain With MSCI Review

(Bloomberg) -- As if falling profits and escalating trade spats at home and abroad weren't bad enough, Samsung Electronics Co.'s shares may be dealt another blow when MSCI Inc. reviews weightings of its stock gauges this week.

The index provider's quarterly review scheduled for Aug. 7 could trigger a net outflow of 458 billion won ($382 million) from the shares of South Korea's top company this month as the nation's weighting is set to get cut in the MSCI Emerging Markets Index, according to estimates from Shinhan Investment Corp.

The ongoing inclusion of China A shares and Saudi Arabia in emerging market stocks will lower the representation of other countries. The move could mean South Korea's weighting will fall by 0.3 of a percentage point to 12%, according to Yuanta Securities Korea and Eastspring Investments Singapore Ltd.

The lower weighting in MSCI indexes, coupled with trade wars and the not-so cheap valuation, may attract more bears on Samsung's stock, which has already seen short interest rising since the end of April.

U.S. President Donald Trump abruptly escalated his trade war with China late last week, announcing that he would impose a 10% tariff on a further $300 billion in Chinese imports while Japan confirmed Friday that it will remove South Korea from a list of trusted export destinations.

Samsung shares have fallen about 6% since the company reported sharply lower profits on Wednesday amid global trade tensions and a wireless industry slump. However, the stock is still up 13% for the year, compared to a 4.3% decline in the benchmark Kospi Index. The gauge fell as much as 2.5% on Monday, set for its lowest close since Nov. 2016 while company's shares declined 2.5% as rising trade tensions worsened its outlook.

“Traders have recently increased short-sell volumes against Samsung's shares and the trend is expected to accelerate ahead of the rebalancing,” Hana Financial Investment said in a note on July 28.

To be sure, Kim Ju-in, a passive fund manager at NH-Amundi Asset Management Co., said that the MSCI's review will only cause a “short-term shock” and what is really moving the market is the trade spat with Japan.

MSCI's review “is going to be a technical overhang on the market” at a time when more investors have started looking to other areas of opportunity in Asia, said Medha Samant, investment director at Fidelity International Ltd.

To contact the reporters on this story: Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net;Heejin Kim in Seoul at hkim579@bloomberg.net;Ishika Mookerjee in Singapore at imookerjee@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Teo Chian Wei

©2019 Bloomberg L.P.