Robeco Asset Management "Expectations for Korean Stock Market as Korea Discount Dissipates"

Robeco Asset Management (hereinafter Robeco) forecasted on the 29th that the attractiveness of the Korean stock market will increase as Korea faithfully implements a long-term roadmap to resolve the Korea discount.

In a market strategy report, Robeco presented the causes and outlook of the Korea discount. According to Bloomberg data from 2014 to 2023, Robeco noted that the price-to-book ratio (PBR) of Korean companies was only 58% of the advanced countries' index average and 34% of the emerging markets' index average. The average price-to-earnings ratio (PER) of the MSCI Korea Index was also 12.2 times. During the same period, this was analyzed to be discounted by 19% and 28% compared to the average PER of Taiwan and Japan, respectively.

Robeco cited insufficient shareholder return policies (dividends and share buybacks), low return on equity (ROE), and limited growth potential as the main causes of the Korea discount, as revealed last year by the Korea Capital Market Institute (KCMI). In 2021, Korea's dividend payout ratio was 19%, the lowest among major countries. Taiwan's was much higher at 55%, followed by the UK at 48%, Germany at 41%, France at 39%, and the US at 37%. China's dividend payout ratio was also 35%.

Although geopolitical risks have often been mentioned as one of the causes of the Korea discount, Robeco viewed this as less convincing given that Korea ranked 5th in the Global Firepower (GFP) military power rankings recently announced, making it a military power, and that the US, ranked 1st, is a key ally. They cited the fact that Taiwan, which faces similarly high military threats, does not receive as high a discount rate as Korea.

Regarding the family-centered governance structure of 'chaebol' companies such as Samsung, LG, and Hyundai, and the difficulty in accommodating minority shareholder opinions, Robeco analyzed that the discount rate applied to chaebol companies since 2007 has been significantly lower compared to other Korean companies, suggesting that this is not a fundamental cause of the Korea discount.

Robeco evaluated that various strategies are being considered to increase shareholder returns of Korean companies. In particular, they positively assessed the ‘Corporate Value-up Program’ announced at the first seminar on ‘Support Measures for Corporate Value-up to Boost the Korean Stock Market’ held on the 26th by the Financial Services Commission in collaboration with the Korea Exchange and related institutions. The approach of this program is similar to the initiative by the Tokyo Stock Exchange in April 2023, which ultimately contributed to the Nikkei 225 index reaching an all-time high, they added.

They also evaluated that the Korean government is taking an active stance on stock market issues. They cited as evidence that short-selling was temporarily banned and that there is agreement on the need to reduce the excessive inheritance tax burden, which greatly influences corporate decision-making. They also judged that Korea’s top inheritance tax rate, reaching 50-60%, inevitably reduces the ownership shares of chaebol families over multiple generations, causing corporate owners to focus more on maintaining control rather than maximizing shareholder value.

Additionally, Robeco pointed out that the Korea discount issue could become an important agenda item in the upcoming April National Assembly elections, as about 12 million stock investors account for roughly one-quarter of voters. They emphasized that improving the performance of the Korean stock market should be a key issue to consider in achieving urgent reforms of the National Pension Service to ensure sustainability.

Sejeong Seo, Senior Analyst and Portfolio Manager at Robeco, said, “Korean society is expected to accept a long-term roadmap to resolve the Korea discount and continue efforts toward this goal. Korea is a stable and attractive market exposed to major investment themes such as green energy, technology, and artificial intelligence (AI). A series of measures to resolve the Korea discount will greatly contribute to improving the performance of Korean stocks.”