[Inside Chodong] The Unattractive Korean Stock Market

Staggered by the Foreign Investors' Korea Exodus
KOSPI Down 7%, KOSDAQ Down 20% This Year
Urgent Need for Government Support to Strengthen Corporate Competitiveness

"Who is investing in the domestic stock market these days?" This is what I often hear when I meet acquaintances who say they invest in stocks. When I ask which stocks or sectors they view positively or if they plan to increase their investment weight, I usually get this kind of answer. A recent article I wrote about the domestic stock market outlook even received comments saying there is no need to look at the domestic market and that I should just relay the US stock market.

This year, the KOSPI has fallen more than 7%. The KOSDAQ has dropped over 20%. It is the worst performance among major countries' stock markets. While the US stock market has been hitting record highs day after day, the KOSPI has continued its downward trend, hitting new yearly lows. Especially after the 'Black Monday' when global markets crashed in August, global markets showed signs of recovery, but the Korean market remained sluggish and then plunged sharply again after the US presidential election, falling to the 2400 level. The domestic stock market situation this year makes it hard to deny the saying, "Escaping the country’s stock market depends on intelligence."

One of the biggest reasons for the domestic stock market’s poor performance is the continued selling by foreigners. Foreign investors, who had actively bought domestic stocks since the end of last year, have changed their minds and are now acting as a drag on the KOSPI’s rise. Since August, foreigners have sold about 17 trillion won worth of domestic stocks. Due to continuous selling, the foreign ownership ratio of the KOSPI has dropped to its lowest level this year. According to the Korea Exchange, as of the 15th, the foreign ownership ratio of the KOSPI market capitalization was 32.3%. It was as high as 36% in July but has been declining since then.

After a period of reaching record highs, the U.S. stock market showed mixed trends, while the domestic market started flat on the 19th. The KOSPI opened slightly higher at 2,469.13 points, up 0.06 points from the previous day, and the KOSDAQ started with a slight decline. Employees are working in the dealing room of Hana Bank in Euljiro, Seoul. Photo by Heo Young-han

Why are foreigners selling domestic stocks? There are various reasons, but the most fundamental is that the Korean stock market is not attractive. Economic conditions and corporate earnings do not provide enough incentives for foreign investors to buy domestic stocks. The Korea Development Institute (KDI), a government research institute, lowered its economic growth forecast for Korea to 2.2% this year. This is a 0.3 percentage point cut following a reduction from 2.6% to 2.5% in August. One out of three companies that announced their third-quarter earnings this year recorded an 'earnings shock,' falling more than 10% below market consensus. The outlook is not bright either. Earnings expectations for the fourth quarter and next year continue to decline. Especially with Donald Trump’s election expected to deal a blow to Korea’s export-driven economy, foreigners’ 'Korea exodus' continues. The only attraction left in the Korean stock market is that recent price declines have increased valuation appeal. In other words, the cheap price is the attraction. However, a cheap price is not the most important factor when buying something.

The Korean stock market has long suffered from the 'Korea discount' (undervaluation of the Korean stock market). To resolve this, the government launched a 'corporate value-up program' early this year to enhance corporate value and has been strongly pushing it. In the first half of the year, foreign funds that left the Chinese stock market flowed into the Korean stock market due to the effect of the value-up program. However, in the second half, as the market continued to decline, the value-up program did not have much impact. Of course, enhancing corporate value is important, but unless companies strengthen their competitiveness, resolving the Korea discount is bound to be difficult. If competitiveness weakens, growth cannot be expected, and investors will turn away. While companies’ efforts to increase attractiveness in the global market are important, government support is above all necessary. Recently, the Japanese government decided on large-scale support to develop semiconductor and artificial intelligence (AI) technologies. Our government should also actively seek support measures to enhance the competitiveness of key domestic industries such as semiconductors.