People walk into the Korea Exchange (KRX) building in Seoul, South Korea, on December 9, 2024, as stock markets across Asia were affected by political turmoil exacerbated by President Yoon Seok-yeol’s role in martial law.
Daniel Zeng | Anadolu | Getty Images
South Korean markets have endured a dismal 2024, with the so-called “Korean discount” in its stock market widening compared to the rest of the world. Recent political unrest is expected to solidify this phenomenon.
The country’s benchmark stock index Kospi has fallen more than 7% this year. The poor performance of the Korean market shows that the “Enterprise Value Enhancement” plan announced in February this year failed to solve the “Korean discount” problem.
The “Korea discount” refers to South Korean securities trading at lower valuations relative to regional peers as investors worry about issues such as corporate governance of large family-owned conglomerates with huge influence on the country’s economy.
Political turmoil in the country has further soured investor sentiment, with the Kospi down 2.3 points from the MSCI Asia ex-Japan index since President Yoon Suk Yeol imposed martial law on December 3 and lifted it within hours. percentage point.
Vishnu Varathan, managing director and head of Asia ex-Japan macro research at Mizuho Securities, said in a December report that the martial law attempt had pushed up risk premiums on Korean assets, causing a setback to “value-added plans.” Notice.
South Korea under Mr Yoon has been trying to boost the country’s stock market and crack down on the “Korean discount” with a Japan-style approach program Aiming to improve corporate governance and increase investor participation, among other things.
according to Korea Exchange Datathis Cospi The P/B ratio is 0.86, while As of December 12, its price-to-earnings ratio was 13.65.
for Compare, Japan’s Nikkei 225 Index As of December 11, the stock’s benchmark price-to-earnings ratio was 1.44 and its price-to-net ratio was 15.90.
While Japanese stocks surged as measures were implemented to boost the market, South Korea has struggled. For example, the “Korea Value Rise Index” launched in September is composed of 100 “best practice” listed companies that comply with the “Value Rise” plan, with a price-to-book ratio of 0.99 and a price-to-book ratio of 0.99.
“In a fragile government and divided politics, removing Yoon Eun-hye could weaken and delay policy efforts to boost stock valuations,” Varatan said, adding that the balance of power in South Korea could shift in favor of the large and influential of conglomerates, which could solidify the balance of power in South Korea. The “Korean discount” is even worse.
South Korea has several large family-owned global conglomerates, known as “chaebols,” often controlled by the founding families. These may consist of a group of companies or several groups of companies.
Notable chaebol include market heavyweights such as Samsung Electronics, LG, SK and Hyundai. While chaebols contribute significantly to national GDP, their complex ownership structures mean investors have little influence over the strategic direction of companies.
The above four business groups account for approximately 40% of South Korea’s GDP. According to Korean media reports.
Lorraine Tan, director of Asia equity research at Morningstar, said market reforms could be frustrated by political unrest, but added that they would not be “derailed.”
“I think the longer a leadership change takes, the more likely investors are to be marginalized. President Yoon is unpopular and a peaceful transition from his leadership would help,” she noted.
The embattled Yoon survived a weekend impeachment vote after members of the ruling People’s Power party quit parliament, but the opposition vowed to continue efforts to impeach him.
Jeff Ng, head of Asia macro strategy at Sumitomo Mitsui Banking Corporation, said the “Korea discount” is still likely to continue into 2025 due to weak economic conditions, slowing exports and a weak Korean won.
“Investor confidence is likely to return in the medium term, but at this stage domestic uncertainty seems unlikely to be resolved quickly.”
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