South Korea’s Stock Market Needs a Jump-Start. What It Will Take.
South Korea is trying to pull a Japan, setting its stock market afire with corporate governance reform. Korea has a tougher hill to climb.
Wednesday’s legislative elections probably won’t make progress any easier. The opposition Democratic Party romped to victory, signaling political deadlock for President Yoon Suk Yeol’s remaining three years in office.
South Korea presents a capitalist paradox: great companies like
or
with awful stock prices. Samsung trades at 1.3 times book value, compared with 6 for rival
says Jonathan Pines, lead portfolio manager for Asia ex-Japan at
Much of this gap is driven by the chaebol ownership—family-controlled businesses that account for the bulk of listed Korean companies. Founding families have largely retreated from Japanese keiretsu, leaving professional if conservative managements.
Korean law offers chaebol clans incentives to keep share prices low, with inheritance taxes that peak around 60%. It hands them a hair-raising range of tools to achieve that end: Corporate directors have no fiduciary duty to shareholders, and there is no limit on related-party transactions—say, the head office buying assets from family or associates. Management can compel minorities to sell their stock at market price.
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Relative to such abuses, the Corporate Value Up Program Yoon’s government unveiled in February struck investors as weak sauce. It was long on Japan-style “name and shame” of under-book-value companies, very short on actual legislation.
“Korea has still not found Japan’s level of corporate governance combined with business fundamentals,” says Laure Negiar, a global equities portfolio manager at Comgest.
Yoon has indicated support for lowering the inheritance tax. That’s unlikely to fly with his left-leaning Democratic opponents, who seem more interested in adding teeth to corporate boards, says James Lim, a partner at Dalton Investments. Decisive measures one way or another could take a while. “My base case is you need to be very selective with Korean investments,” he says.
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That doesn’t mean the status quo can last forever. The ranks of individual Korean investors have more than doubled since prepandemic to 14 million, from a population of 52 million, as real estate cooled and Robin Hood-like services caught on.
“That’s a powerful voting bloc” against chaebol families, Pines says. He is overweight Korean stocks, reasoning they are cheap enough to benefit from any reform. “In some ways it’s a free option, and improvement is possible,” he says.
Dalton’s Lim is avoiding the famous Korean names but digging deep for a few smaller mavericks. His top pick is
run by a renegade chaebol scion who is returning 50% of profit to shareholders. The result: an eightfold increase in share price over the past three years. Lim is also keen on regional bank
The stock is up 50% in the past year.
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Igor Tishin, a tech analyst at Harding Loevner, likes the business case for Samsung despite governance concerns. The Korean giant is leading the global race for high-bandwidth memory chips that will be essential for artificial intelligence, and the closest competitor to Taiwan Semi in chip manufacturing, he argues.
“Samsung is an underappreciated enabler of the AI revolution,” Tishin says.
The prospect of Samsung and other companies shedding the “Korea discount” and catching up to global peers is certainly enticing. Just don’t hold your breath.
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Read More: South Korea’s Stock Market Needs a Jump-Start. What It Will Take.