[KOSPI Level-Up] ① The Era of 5000: Dream or Reality?

Diagnosis from 20 Capital Market Experts
Lee Myungbak's Pledge Also Remained Unfulfilled...
"Korea Discount Must Be Resolved for Success"
Improvements in Corporate Governance, Expanded Shareholder Returns, and Regulation of Spin-Off Listing

Editor's Note
With the presidential election in June approaching, the topic of another "KOSPI Level-Up" has once again come to the forefront. Lee Jaemyung, the Democratic Party candidate, has predicted the era of KOSPI 5000, and Kim Moonsu, the People Power Party candidate, has pledged to break out of the so-called "Boxpi" (boxed-in KOSPI) as a campaign promise. Both are calling for stock market stimulation, and they agree on the broad framework that "Korea Discount" (the undervaluation of the Korean stock market) must be resolved, for example through improvements in corporate governance. However, their approaches differ in the details. Based on a survey and interviews conducted with 20 domestic and international capital market experts, Asia Economy will run a three-part series diagnosing the current state and challenges of the Korean stock market. The series will also examine what policies the next administration should pursue to shed the "Korea Discount" label and identify the key variables and obstacles that will determine whether the dream figure of 5000 can be achieved.

[KOSPI Level-Up ①] The Era of 5000: Dream or Reality? 20 Experts Weigh In

[KOSPI Level-Up ②] "What the New Administration Must Do": Examining Policy Proposals to Boost Stock Prices

[KOSPI Level-Up ③-1] "A Strong Commitment to Value-Up Like Japan Is Needed... Both Strong Incentives and Discipline Are Essential"

[KOSPI Level-Up ③-2] Achieving the Dream Figure Depends on Three Key Factors

"It's still too early. Many aspects of the stock market need to change." "It's not impossible, but the probability is not high." "The symbolic meaning is more important than the number itself. The stock index can certainly rise to a sufficiently high level."

Can the KOSPI, currently hovering around the 2,600 mark, reach the 5,000 level within the next five years? Capital market experts both in Korea and abroad are divided in their assessments of the June presidential campaign promises. While a significant number are skeptical, believing it will be difficult in reality, there is also optimism that it is not impossible if reforms are implemented in areas such as corporate governance, which foreign investors have long pointed out as a weakness in Korea.

"Low Probability... But Structural Level-Up Possible": Survey Results from 20 Experts

Asia Economy conducted an anonymous survey and interviews with 20 capital market experts-including heads of research centers at securities firms, academics, and investment banking professionals-from May 12 to 21, ahead of the presidential election. The results showed that 6 respondents (30.0%) said achieving KOSPI 5000 would be "difficult." Only 2 (10.0%) said it would be "possible," provided there are institutional improvements such as amendments to the Commercial Act. Nearly half, 8 experts (40%), maintained a "neutral" stance, refraining from expressing political preferences given that KOSPI 5000 is a campaign pledge of a specific candidate, despite the survey being anonymous. The remaining 4 did not respond.

The head of research at Securities Firm A, who participated in the anonymous survey, said, "I believe the era of KOSPI 5000 will come as long as the Korean economy does not fall into deflation, but is it achievable within five years? Considering both the global macroeconomic environment and domestic corporate growth, it's not an easy issue." The head of research at Securities Firm B also dismissed the possibility, stating, "For KOSPI to reach 5000, the size of the economy would also need to double. I don't think it's possible in the short term." An asset manager at C Investment Partners, a foreign asset management firm, commented, "Even flagship stocks like Samsung Electronics are not in a favorable cycle. The probability is not high."

However, some respondents said that if issues such as the Commercial Act and corporate governance are improved to resolve the Korea Discount, reaching KOSPI 5000 is possible. Professor D stated, "If you calculate with compound interest, it's not an impossible number. But fundamental improvements in corporate governance and shareholder returns must be prerequisites." Even among those who said achieving KOSPI 5000 would be difficult, about half believed that the next administration could structurally raise the KOSPI index to a higher level. The head of research at Securities Firm E pointed out, "If institutional improvements are accompanied by economic policies that enhance long-term growth potential and favorable global conditions are maintained, the probability of realization could increase over the long term."

Resolving the "Korea Discount" Is the Key

This is not the first time KOSPI 5000 has been proposed as a presidential campaign pledge. Former President Lee Myungbak once said, "During my five-year term, KOSPI should reach 5000 to be considered normal." Candidate Lee Jaemyung also made the same pledge in the previous election, promising to boost the stock market. Simple calculations show that for KOSPI to reach 5000, it would have to rise by more than 100% from its current level. The only administration where KOSPI rose by more than 100% was under the 16th president, Roh Moo-hyun.

Accordingly, many believe the key issue is whether the chronic problem of the Korea Discount in the Korean stock market can be resolved. The survey and interviews revealed that capital market experts commonly identified the following as Korea Discount factors: ▲corporate governance ▲relatively low shareholder returns ▲increased spin-off listings.

Mr. F, an Asian investment manager at a Hong Kong-based asset management firm, cited "corporate governance" as the biggest problem with the Korean capital market from a foreign perspective. This encompasses corporate governance, low dividends, and spin-off listings. He said, "There are many good companies in Korea, but the link to the market is broken. Only when independent boards of directors are established will foreign investment funds return to Korea with optimism." He also referenced the fact that even Steve Jobs, the founder of Apple, was ousted and then brought back by the board, saying, "That's the role of the board. The purpose of corporate governance is to maximize company value."

Duplicate listings are another key Korea Discount factor cited by foreign investors. According to IBK Investment & Securities, as of November last year, the duplicate listing rate in the Korean stock market was 18.4%. This is significantly higher than Japan (4.38%), China (1.98%), and the United States (0.35%). The head of research at Securities Firm G pointed out, "The high export dependence of domestic corporate earnings remains unchanged, and in fact, it has become even more pronounced. While shareholder-friendly policies among domestic companies have strengthened compared to before, the increase in the number of shares supplied due to spin-off listings by large corporations remains a problem." The main issues caused by duplicate listings are double counting (overlapping profit effects) and the formation of pyramid ownership structures. Additionally, the rise of "Seohak Ants" (Korean retail investors investing overseas) and the growth of the virtual asset market have contributed to the Korean stock market being shunned by investors.

Hwang Sewoon, Senior Research Fellow at the Korea Capital Market Institute, commented, "The main Korea Discount factors cited in academia are relatively poor corporate governance, insufficient shareholder return policies, and many shortcomings in terms of tax (policy). If policies can be implemented to address these issues, there is enough room for stock prices to rise." Lee Namwoo, Chairman of the Korea Corporate Governance Forum, emphasized, "The Korea Discount is a disaster on par with the low birth rate. The next administration must resolve it through institutional reforms in line with global standards."