From Samsung and LG to Hyundai and K-pop, South Korean products are globally famous, says Steven Frazer in Shares. Yet the nation’s world-beating companies haven’t made for a successful stock market. The local Kospi index has lagged the global average for much of the last 15 years, and the resulting “Korea discount” has proved stubbornly resistant to attempts to close it.
“South Korea has for years been the cheapest equity market in Asia, and even the world,” says Will Lam of Invesco. Korean shares have gained less than 2% since the start of the year, a poor showing given the AI chip boom plays to the country’s strengths. Politicians in Seoul have been looking enviously at Japan, where the Topix has surged almost 16% since the start of the year.
South Korea’s stock market falls behind Japan
Both Korea and Japan host “conglomerate businesses”, often family-run, with “inefficient balance sheets”, poor returns on equity and stingy dividends, says Alison Savas of Antipodes Partners in Wealth Briefing Asia. Elaborate networks of cross-shareholdings (when companies own shares in each other) “can resemble a Jackson Pollock”. The difference? Japan has spent the last decade slowly reforming its corporations, prodding them to act more.
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Will Korea stay cheap? Chip index feels more chipper in the interests of ordinary shareholders. That ultimately helped foster the “phenomenal run” in Tokyo over the past year. Korea wants to play catchup, but it has a long way to go – 70% of Kospi constituents are priced at less than one times book value, a sign that management is doing a poor job at putting assets to work.
In February, Korea launched the “Corporate Value-up programme”, says Malene Jensen for Al Jazeera. Modelled on reforms in Japan, it aims to use tax incentives to encourage companies to “share more of their profits with shareholders”. But the measures failed to impress foreign investors, many of whom have soured on Korea in recent months.
The proposals are “vague” and lack any teeth for enforcement. They also fail to deal with “root” causes like high inheritance taxes, which encourage the families that own conglomerates to “keep share prices low” in order to pass the business on to the next generation with a smaller bill. Korean inheritance taxes “peak around 60%”, notes Craig Mellow in Barron’s.
President Yoon Suk Yeol’s plans to change that could be thwarted by the centre-left opposition, which controls the legislature after April’s elections. There is one bright spot – 14 million Koreans now invest in the stock market, more than double the pre-Covid figure. That growing voting bloc could eventually put pressure on the country’s politicians to pass pro-shareholder reforms, but it will be a long slog. South Korea’s “capitalist paradox: great companies with awful stock prices” isn’t going away any time soon.
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