[Inside Chodong] The Long and Distant Road to Korea Premium

Korea's Position Shrinking in the Global Market
Urgent Need for Practical Policy Support
Such as Governance Reform and Tax Benefits

Recently, Jung Eun-bo, Chairman of the Korea Exchange, announced the 'Core Strategy of the Exchange Toward Korea Premium' at the New Year's press briefing. The strategy focuses on achieving capital market value-up through the continuous promotion of the value-up program, securing future growth engines through the advancement of data and index businesses, enhancing investor trust through strengthened delisting and improved market management systems, and strengthening global competitiveness.

It feels like quite a big gap to talk about a premium when the label of discount has not yet been completely removed. Several questions arise. Has the Korea Discount (undervaluation of the Korean stock market) been resolved after just one year of promoting the value-up program? Has the value-up program produced the expected effects? If the discount has been resolved, why are foreigners continuing to sell off the domestic stock market day after day?

Chairman Jung expressed his determination, stating, "In response to this year's challenging capital market environment marked by rising domestic and international uncertainties, we will faithfully carry out strategic tasks so that the Korean market can leap forward as a 'Premier Capital Market'." Ultimately, the goal is to enter and compete in the top-tier market, but it is true that doubts remain about whether the Korean capital market has the competitiveness to compete at the highest level.

The Exchange stated that it will strive to be included in global advanced indices through opening index usage rights, but the position of the domestic stock market in the global market is gradually narrowing. It has yet to enter advanced indices, and its weight is also decreasing in emerging market indices. The weight of the Korean market in the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index, which used to fluctuate between 10% and 18%, has now dropped to the 9% range. As of the end of last year, China's weight reached 27.79%, and India and Taiwan each have weights exceeding 19%. In the recent MSCI February regular review, 11 Korean constituent stocks were removed in bulk, further reducing its weight. Since 2011, the number of MSCI Emerging Market index constituents has increased from 802 to 1,210, but during the same period, the number of Korean stocks decreased from 102 to 81. The Asian Corporate Governance Association (ACGA), which counts global long-term investors as members, expressed concern about the diminishing presence of the Korean market in the global market by sending a letter to the National Assembly in December last year urging amendments to the Commercial Act. ACGA pointed out that if a country's weight is below 10%, it is not recognized as a meaningful market in international financial markets.

The talk of resolving the Korea Discount and moving toward the Korea Premium era is not new. Twenty years ago, in 2005, when the KOSPI surged more than 50% and the stock market was booming, rosy expectations for resolving the Korea Discount were inflated. At that time, the market was flooded with forecasts that the Korean stock market would continue to be re-rated, leaving the discount era behind and entering the premium era. However, even now, the Korean stock market is still held back by the Korea Discount.

Although the value-up program promoted to resolve the Korea Discount has yet to produce effects beyond expectations, the changed movement to enhance corporate value, such as about 100 companies participating in value-up disclosures, is positive. Tax benefits and other value-up support bills that failed to pass the National Assembly last year should be promptly promoted to strengthen efforts to enhance corporate value. Raising undervalued corporate value is essential to cut off the label of Korea Discount and truly move toward the Korea Premium era.