When South Korea’s KOSPI index rose by 35% from 2014 to 2024, the US NASDAQ index surged by 256%. This significant difference prompted the country’s financial regulatory body, the Financial Services Commission (FSC), to introduce support measures, dubbed the “Corporate Value-up Program,” on Feb. 26, to address the ‘Korea Discount.’
The term Korea Discount refers to the tendency for South Korean securities to be undervalued or subject to an inflated risk premium by investors due to factors including geopolitical risks related to North Korea, corporate governance issues, limited participation of foreign investors, and aspects of a company’s management or corporate structure.
As part of the initiative, the FSC plans to introduce the “Korea Value-up Index” tailored for institutional investors, including pension funds. Additionally, Exchange-Traded Funds (ETFs) tracking the index will be listed to facilitate retail investors’ access to these companies. This index model draws inspiration from Japan’s JPX Prime 150, comprising the best-performing companies in Japan.
Detailed guidelines for participation will be finalized, and a dedicated web portal will be established in June, according to the FSC. Companies ready to disclose their ‘value-up’ plans will have the opportunity to do so in the second half of 2024.
Quantifying the ‘Korea Discount’
The market size of South Korea is by no means small. As of the end of last year, the market capitalization of the domestic stock market reached 2,558 trillion won, ranking 13th globally. This figure represents 116.2% of the Gross Domestic Product (GDP), indicating that the stock market has grown to a level surpassing that of the real economy.
In most advanced countries, the market capitalization of their stock markets exceeds their GDP. For instance, at the end of last year, the United States’ market capitalization represented 166.4% of its GDP, Japan’s was 123%, and the United Kingdom’s was 113.2%. However, in emerging economies, GDP still exceeds market capitalization. China’s market capitalization was only 57.1% of its GDP, while India’s was 90.8%.
Regarding the number of listed companies, South Korea closely aligns with advanced nations. There were 2,558 companies listed on the South Korean stock market at the end of last year, placing South Korea seventh globally after the U.S., China, India, Japan, Canada, and Hong Kong. The average annual growth rate of listed companies is 3.5%.
Despite this growth, market evaluations for South Korea remain low. During the same period, the Price-to-Book Ratio (PBR) only reached 1.05 times, suggesting undervaluation by the market compared to its assets.
In advanced countries like the U.S. (4.55 times), Japan (1.42 times), and the United Kingdom (1.71 times), the PBR easily surpasses 1. However, South Korea’s PBR is even lower than China’s (1.13 times). India, another emerging economy, has a PBR of 3.73 times, while Taiwan’s is 2.41 times.
Even when considering the Price-to-Earnings Ratio (PER), South Korean companies are undervalued. Over the past decade, the average PER in South Korea has been 14.16 times, compared to 19.69 times for advanced countries and 14.32 times for emerging countries. By the end of last year, South Korea’s PER had grown to 19.78 times, surpassing the average for emerging countries (15.32 times) but still lower than the average for advanced countries, which is 20.23 times.
FSC urges efficient capital use for market evaluation alignment
The FSC mentioned that one of the main reasons for the undervaluation of stocks is the ineffective utilization of capital by companies.
Return on Equity (ROE) illustrates how effectively a company uses its capital. South Korea’s ROE stood at 5.2 times at the end of last year, lower than that of advanced countries like the U.S. (17.7 times), Japan (8.6 times), the United Kingdom (15.9 times), and even lower than that of China (9.8 times). Furthermore, South Korea’s dividend payout ratio is lower than that of China, with South Korea recording 26.0% over the past decade and China recording 31.3%.
The FSC emphasized the importance of companies taking active measures to enhance their corporate value, stating, “For our capital market to advance further, it is crucial for companies to make efforts themselves. Alongside institutional improvements for the development of the capital market, substantive changes are possible only when accompanied by efforts from companies.”
