Daily Management Review

South Korea Announces Initiatives To Improve Stock Markets And Address The "Korea Discount"


South Korea Announces Initiatives To Improve Stock Markets And Address The "Korea Discount"
Taking a page from Japan's playbook, South Korea's financial regulatory authority outlined steps to enhance corporate governance on Monday in an effort to eliminate the "Korea discount" and strengthen its undervalued domestic markets.
Details of the "Corporate Value-up Programme," which seeks to "encourage listed companies to voluntarily set up and disclose valuation enhancement plans" and prioritise shareholder returns through a variety of incentives, including tax benefits, were provided by the Korea Financial Services Commission.
The fourth-largest economy in Asia's stock market valuations are being raised by Korean authorities, as evidenced by the FSC's decision. Analysts frequently refer to the country's stock markets as being undervalued, a phenomenon known as the "Korea discount."
The FSC admitted that there were similarities between its programme and Japan's, which has resulted in record highs for Tokyo markets for the first time in 34 years.
After reaching yet another high on Monday due to strong results and the government's push for improved corporate governance reforms to increase shareholder returns, Japan's Nikkei 225 index moved comfortably above 39,000 points.
The "Korea Value-up Index" would be made available to institutional investors, such as pension funds, according to the FSC. The statement reads, "ETFs that track the Korea Value-up index will also be listed to facilitate retail investors' access to these companies."
The index bears resemblance to the JPX Prime 150, a list of Japan's top-performing corporations.
Although the overall direction of the measures is seen favourably, according to Daniel Yoo, head of global asset allocation at Yuanta Securities Korea, "it lacks the detail of how the corporations will increase dividend payout ratio, stock buyback and cancellation."
“It requires additional efforts to accomplish what it intends to do,” Yoo said.
According to the FSC, specific rules will be decided upon and a special website will be launched in June. Businesses that are prepared to reveal their "value-up" plans will have the opportunity to do so by the second half of 2024.
Can the untouchable chaebols of South Korea change?
Lead portfolio manager of Asia ex-Japan at Federated Hermes Jonathan Pines stated, "Some investors, understandably, avoid Korean stocks," adding that of those who do buy, most eventually sell at a significant discount to value.
According to Pines, "they understand that it is optimistic and risky to wait until a stock price reaches the objective assessment of intrinsic value that would apply in a well-regulated market."
While Japan's Nikkei has gained 17.5% so far this year, South Korea's Kospi has lost 0.2%.