South Korea’s Stock Market Awakening: Shaking off the “Korean Discount”

South Korea’s Stock Market Awakening: Shaking off the “Korean Discount”

Korea is poised to follow in Japan’s footsteps as its stock market undergoes a revival, spurred by an unexpected catalyst—the government itself. President Yoon Suk Yeol’s recent speech targeting the longstanding issue of the “Korean discount” has set the stage for potential reforms aimed at boosting valuations and investor confidence.

Government Intervention and Market Response:

• Inspired by Japan’s successful measures, Korean regulators are considering implementing policies to address undervaluation, including a “name-and-shame” approach for undervalued companies.
• The forthcoming “corporate value-up program” is anticipated to be unveiled on Monday, signaling a proactive stance toward enhancing market competitiveness.

Challenges and Historical Context:

• Historically, high inheritance taxes and familial control over major Korean corporations have incentivized keeping valuations low, hindering transparency and corporate governance.
• However, a surge in retail ownership during the pandemic has shifted the political landscape, empowering minority interests and driving momentum for change.

Market Reaction and Potential Reforms:

• Anticipation of reforms has already driven up stock prices, with Hyundai Motor and Kia witnessing significant gains since President Yoon’s speech.
• Despite the rally, many Korean stocks remain undervalued, with Hyundai trading at a mere 70% of net asset value (NAV).

Path to Value Enhancement:

• Hyundai’s complex shareholding structure, typified by circular ownership, contributes to a conglomerate discount, deterring investors.
• Potential solutions include the untangling of shareholding structures and strategic initiatives such as the proposed IPO of Hyundai’s Indian business, aimed at unlocking value and diversifying markets.

Future Outlook:

• Hyundai’s IPO plans reflect a commitment to shed its undervaluation stigma, signaling a shift toward proactive measures to enhance shareholder value.
• With government pressure mounting and investor sentiment on the rise, the recent market rally could signify just the beginning of Korea’s journey toward market revitalization.