People walk inside the Korea Exchange (KRX) building as stock markets across Asia are affected by heightened political turmoil over President Yoon Suk Yeol’s role in martial law, in Seoul, South Korea, on December 9, 2024.
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South Korean markets have had a disastrous 2024, with the so-called “Korean discount” widening in its stock markets compared to other global peers. The recent political upheaval is expected to root out this phenomenon.
The country’s benchmark stock index Kospi has lost more than 7% this year and the underperformance of the South Korean market points to its “Corporate Rating” program. It was announced in February this yearfailed”Korean discount“
The “Korea discount” sees South Korean stocks trade at lower valuations compared to regional peers amid investor concerns over issues such as corporate governance at large family-owned conglomerates that have a major impact on the country’s economy.
The country’s political turmoil has further soured investor sentiment, with Kospi undervalued. MSCI Asia Ex-Japan Index by 2.3 percentage points, just hours after President Yoon Suk Yeol imposed martial law on December 3 and later lifted it.
The attempted martial law has sent the risk premium on Korean assets higher, setting back the “Value Enhancement Program,” Vishnu Varathan, managing director and head of Japan Asia macro research at Mizuho Securities, said in a December report. 10 note.
Yoon’s South Korea strove to promote the country’s stock markets and combat the “Korean discount” through a Japanese style. the program he wanted to improve corporate governance and increasing investor engagement, among others.
according to Data from Korea Exchangehas Kospi It has a price-to-price ratio of 0.86 its price-earnings ratio is 13.65 as of December 12. Both metrics, which indicate how much investors value the index, have it has decreased since a year ago.
In fact comparison, Japan’s Nikkei 225 the stock benchmark has a price-to-earnings ratio of 1.44, and its price-to-earnings ratio is 15.90 as of December 11.
In the meantime Japanese stocks rose like he implemented measures to raise his marketsSouth Korea has been struggling. For example, the “Korea-Value Up Index” launched in September, which consists of 100 companies listed as “best practices” that comply with the “Value-Up” program, has a price-to-price ratio of 0.99. -Win ratio just 10.29.
“Amidst a fragile government and fragmented politics, the downsides of removing Yoon are likely to curtail and delay policy efforts to boost stock valuations,” Varathan said, adding that the balance of power in South Korea could shift in favor of large and influential conglomerates. . Even more “Korean discount”.
South Korea has several family-owned global conglomerates, known as “chaebols,” usually controlled by the founder’s family. These can be owned by a group of companies or several groups of companies.
Prominent chaebols are market heavyweights such as Samsung Electronics, LG, SK and Hyundai. Despite their large contribution to the country’s GDP, the complex shareholding structure of chaebols means that investors have little influence over the company’s strategic direction.
The four conglomerates mentioned above make up about 40% of South Korea’s GDP, According to South Korean media.
Market reforms may face a setback due to political turmoil, said Lorraine Tan, director of Asia equity research at Morningstar, adding that the reforms will not be “undone”.
“I think the longer the leadership changes, the more likely investors will be sidelined. Chairman Yoon is not popular and a peaceful transition away from his leadership would help,” he said.
Yoon has bandages He survived an impeachment vote over the weekend after members of the ruling People’s Power Party walked out of the country’s parliament, but opposition parties have 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 persist in 2025 due to weak economic conditions, slower exports and weak Korean earnings.
“Investor confidence may return in the medium term, but at this stage it is difficult to resolve domestic uncertainty quickly.”
