The upgrade comes after FTSE surprised global fund managers last September by choosing to upgrade Israel to developed-market status instead of South Korea.
South Korea's promotion should lead to increased funds flows into its stock market, said Jerry Moskowitz, president of FTSE Americas, in an interview with MarketWatch.
"We estimate that just with the FTSE indices alone, it could be high as $10 billion, but we believe other index companies will follow," Moskowitz said. "The net could be as high as $25 billion of new funds flowing into the Korean stock market."
FTSE also said Wednesday that red-chip stocks, which are currently included in Hong Kong, a developed market, will be moved to China, a secondary emerging market. Red chips are Chinese companies trading on the Hong Kong exchange, but that have at least 50% of their revenues generated from business in mainland China.
The changes announced Wednesday will be implemented in the FTSE Global Equity Index Series in September 2009.
FTSE currently classifies countries as developed, advanced emerging, secondary emerging, and frontier.
Taiwan, which is being considered for promotion to developed market status from advanced emerging, will remain on FTSE's so-called watch list. The list includes countries that FTSE is actively monitoring for possible promotion or demotion.
While FTSE praised Taiwan for its progress on implementing market reforms over the past 12 months, the index provider said that no change in Taiwan's status will be made at this time.
Pakistan has been removed from the FTSE's watch list and will no longer be considered for possible demotion to frontier market status from secondary emerging.
What does the upgrade mean for South Korea?
The market reaction to South Korea's upgrade was muted Thursday, as global markets continue to be dominated by unprecedented turbulence.
In Seoul, the Kospi index fell 2.3%. It is down 27% this year.
Still, analysts say FTSE's upgrade of the market will likely be a major positive in the long term.
"Given the current deep undervaluation due to the ongoing global financial market turbulence, concerns over a local forex crisis and capital concerns, even a small positive, such as the potential upgrade, could trigger a rally," said Clemens Kang, a strategist at Woori Investment and Securities, in a research note.
Also, funds benchmarking advanced markets are ten times larger than those benchmarked against emerging markets, indicating that substantial capital inflows are possible for the Korean equity market, Kang said.
However, Kang cautioned: "We believe the upgrade will have only a limited near-term impact on the Korean market, as any net increase in foreign capital will likely begin after" the first quarter of 2009.
Analysts at Hyundai Research said that, judging from Israel's experience, Korea can expect a re-rating of market valuations as well as reduced market volatility when it's included in the developed market index.
"We believe large caps should benefit relatively more when Korea is classified as a developed market, given the attributes -- conservative, long-term based investment -- of global investment funds that will likely flow in," Hyundai Research said.
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