[Inside Chodong] Korean Stock Market Lags Behind China

Expectations Rise for Resolving the "Korea Discount" through Value-Up Efforts
But MSCI Developed Markets Index Inclusion Fails Again
Korean Trading Guidelines Criticized as Less Transparent Than Those of China

This year, as the government actively introduced the 'Corporate Value-Up Program' to address the 'Korea Discount' (undervaluation of the Korean stock market), expectations grew that the relative undervaluation phase of the Korean stock market could be alleviated even slightly. Fueled by these expectations, the stock market, which had been sluggish at the beginning of the year, broke out of its slump and entered an upward trend after the government announced plans to introduce the Corporate Value-Up Program. Although the market experienced some corrections due to fading hopes of U.S. interest rate cuts, it resumed its upward momentum in June, with the KOSPI reclaiming the 2800 level for the first time in two years and five months.

Since the Corporate Value-Up Program has opened the way for the KOSPI's rise, there is hope that if the program is implemented as planned and corporate values increase, the long-standing label of undervaluation attached to the Korean stock market could be removed. However, it seems difficult to resolve undervaluation by value-up efforts alone.

The failure of the Korean stock market to be included in the Morgan Stanley Capital International (MSCI) Developed Markets Index indicates that there is still a long way to go to resolve the undervaluation of the Korean stock market. According to MSCI's 2024 annual market classification results announced on the 20th of last month, the Korean index, classified as an emerging market, remained unchanged. Korea was included in the Emerging Markets Index in 1992 and was placed on the watchlist for promotion to the Developed Markets Index in 2009 but has been excluded from the watchlist since 2014. MSCI classifies Korea as an emerging market due to market accessibility issues. The requirements for inclusion in the MSCI Developed Markets Index include economic growth level, stock market size and liquidity, and market accessibility for foreign investors. While Korea meets the standards for economic growth, stock market size, and liquidity at a developed market level, it has repeatedly failed to enter the developed markets index due to lagging market accessibility. In this year's MSCI market accessibility evaluation, the Korean stock market was assessed as needing improvement in 7 out of 18 categories. The number of categories requiring improvement increased from 6 last year to 7 this year, partly due to a negative evaluation related to short selling regulations.

In this context, a recent report published by the Korea Capital Market Institute vividly shows how foreign investors view the Korean market. The report contains the results of interviews conducted with 45 representatives from 15 overseas financial institutions regarding Korea's market accessibility. Most interviewees acknowledged that while the Korean market effectively belongs to the developed market category, its convenience and efficiency in terms of market accessibility lag behind those of developed markets. In particular, they pointed out that Korea's trading regulations and guidelines are less transparent compared to developed markets such as Hong Kong and Singapore, and even fall short compared to China. Although China's market participation and tradable products are relatively limited, the trading guidelines for permitted financial products are clear, whereas the Korean market has many enigmatic aspects.

In the first half of this year, foreign investors led the KOSPI's upward trend by net purchasing 23 trillion won. During the same period, individual investors net sold over 7 trillion won, and institutions net sold more than 12 trillion won. The KOSPI's reclaiming of the 2800 level was essentially driven by foreign investors. Foreign investors account for about 35% of the KOSPI's market capitalization. Negative evaluations of the Korean stock market by foreign investors, who play a key role in the domestic market, inevitably sting. For the true value-up of the Korean stock market, these criticisms must be humbly accepted and active improvements pursued. So far, the government has taken various measures to enhance domestic capital market accessibility, such as abolishing the foreign investor registration system, expanding English disclosures, improving dividend procedures, and extending foreign exchange market trading hours. However, since the expected effects have not yet been realized, more bold improvement measures must be sought.