A man leads a bull during a ceremony celebrating the New Year’s opening of the South Korea stock market at the Korea Exchange in Seoul on January 2, 2023.
Jung Yeon-je | Afp | Getty Images
South Korea’s financial regulatory body unveiled measures to improve corporate governance on Monday, taking a leaf out of Japan’s playbook, to boost its undervalued local markets and address the “Korea discount.”
Korea’s Financial Services Commission furnished details of its “Corporate Value-up Program,” which aims to prioritize shareholder returns through various incentives including tax benefits, and “encourage listed companies to voluntarily set up and disclose valuation enhancement plans.”
The announcement by the FSC highlighted steps that Korean authorities are taking to boost valuations of stock markets in Asia’s fourth-largest economy. The country’s stock markets are often considered undervalued by analysts, who refer to the phenomenon as the “Korea discount.”
The FSC acknowledged the similarities in its program with that of Japan’s that has seen Tokyo markets hitting record highs for the first time in 34 years.
Japan’s Nikkei 225 index traded comfortably above 39,000 points after hitting yet another high on Monday on the back of robust earnings and the government’s push for better corporate governance reforms to boost shareholder returns.
The FSC said it will also introduce the “Korea Value-up Index” for institutional investors, including pension funds. “ETFs that track the Korea Value-up index will also be listed to facilitate retail investors’ access to these companies,” according to the statement.
The index is similar to Japan’s JPX Prime 150 which comprises Japan’s best-performing companies.
Stock Chart IconStock chart icon
Daniel Yoo, head of global asset allocation at Yuanta Securities Korea said the general direction of the measures is being viewed as a positive, however, “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 told CNBC.
Detailed guidelines will be finalized and a dedicated web portal will be set up in June, the FSC said, adding that companies that are ready to disclose their “value-up” plans will be able to do so in the second half of 2024.
“Some investors, understandably, avoid Korean stocks,” Jonathan Pines, lead portfolio manager of Asia ex-Japan at Federated Hermes told CNBC, noting that among those that do invest eventually sell at a large discount to value.
“They understand that to wait until a stock price reaches the objective assessment of intrinsic value that would apply in a well-regulated market is optimistic and risky,” Pines said.
South Korea’s Kospi has lost 0.2% so far this year, while Japan’s Nikkei has gained 17.5% in the same period.
— CNBC’s Naman Tandon, Lim Hui Jie and Clement Tan contributed to this story.