[Interview] Wall Street Veteran Warns: "Four Reasons the Korean Stock Market Still Can't Be Trusted"

David Roche, First to Warn Wall Street of the Asian Financial Crisis
Despite KOSPI Rally, "Korea Discount" Factors Remain
"Urgent Need for Governance Reform, Elimination of Circular Shareholding, and Realization of Shareholder Value"

"I am no longer able to take it on faith. So I, and I suggest many other foreign investors, will await firm evidence."

David Roche, founder of Quantum Strategy and a globally renowned investment strategist (pictured), pointed out that despite the rally in the Korean stock market following the launch of the new administration and capital market revitalization policies such as amendments to the Commercial Act, the so-called "Korea Discount"-the undervaluation of the Korean stock market-remains a concern for overseas investors. He warned that unless more sustained and substantive reforms in corporate governance are guaranteed, the recent rise in stock prices could end up being nothing more than a temporary rebound.

David Roche, founder of Quantum Strategy. Photo by David Roche

In a recent written interview with The Asia Business Daily, Roche identified four main factors behind the undervaluation of the Korean stock market in global markets: ▲proximity to North Korea, ▲recent demonstrations of democratic fragility in South Korea, ▲family ownership of chaebols, lack of transparency, and concerns that equity investor interests may not be prioritized, ▲equity market sector weighting differences compared to other markets.

Roche, a prominent investment strategist formerly with Morgan Stanley, was the first on Wall Street to warn of the 1997 Asian financial crisis, including in Korea. After founding Independent Strategy, he recently established Quantum Strategy in Singapore and remains highly active in the field.

First, Roche highlighted that the Korean capital market cannot escape the risks associated with its geographical proximity to North Korea. He also assessed that the December 2024 martial law incident exposed Korea's democratic vulnerabilities. "Of course, the risks are less now, but lingering doubts remain," he said, adding, "Most (foreign) investors would like to see institutional reform of presidential powers ensuring that such things cannot happen again." At the time, Roche advised global investors holding Korean assets to remain calm, describing the incident as a "storm in a teacup" as soon as the Korean National Assembly passed a resolution to lift martial law.

He repeatedly emphasized the need for corporate governance reform. Roche noted that there are concerns that, due to the family-owned chaebol structure and low transparency, the interests of owners (the chaebol families) are prioritized over shareholder value at Korean companies. He also argued that the most urgent reforms to enhance the value of the Korean capital market are "ownership reform, transparency, unwinding of cross-holdings, focus on core activities, and realization of shareholder value." When asked how important such corporate governance reforms are to increasing the value of the Korean stock market, he replied, "Very!!!!!"-with five exclamation marks to underscore just how strongly he feels about the issue.

Roche also pointed out, "The main difference in the Korean market compared to other markets is the dominance of the Korean equity market by a few chaebols, as well as, more specifically, by the technology and manufacturing sectors." He identified the structure in which the entire KOSPI index becomes highly volatile due to declines in flagship stocks such as Samsung Electronics and SK Hynix as a problem. These two stocks alone account for around 25 to 30 percent of KOSPI's total market capitalization. "This means investment in the broad Korean market provides poor diversification compared to peer equity markets. That makes Korean equities more risky. In turn, this warrants a lower price-to-earnings ratio (PER), etc."

In the interview, Roche welcomed the Lee Jaemyung administration's capital market revitalization policies but criticized the de facto goal of achieving "KOSPI 5000" during the term as a "silly" approach. He reiterated the need for reforms in governance, the elimination of circular shareholding, and the realization of shareholder value, saying, "The government should not target market values but target reforms that improve them."

He also noted that, despite continued net foreign buying and the KOSPI surpassing the 3,600 mark thanks to recent amendments to the Commercial Act, skepticism remains high among foreign investors. Having observed the Korean stock market for many years as an investment strategist, Roche asserted, "I have lived through so many false dawns about chaebol reform that I am no longer able to take it on faith."

This suggests that, having witnessed numerous failed reform attempts by the Korean government, he believes things could be reversed at any time, even now. "So I-and I suggest many other foreign investors-will await firm evidence," he emphasized, stressing that only further progress and guarantees of the continuity and consistency of reforms will be able to remove the chronic "Korea Discount" label attached to the Korean stock market.

Roche also evaluated that growing global economic uncertainty and the increasingly fragmented world order could pose challenges to Korea's future capital market reforms. He diagnosed, "Fragmenting world order and U.S. reversion to monetized foreign relations are a major threat to Korea as one of the world's most internationalized economies."

Regarding Korea's plan to extend stock trading hours within the year and eventually move toward a 24-hour system like the U.S. Nasdaq, he commented, "I don't think this makes much, if any, difference to my long-term assessment of the market." However, he added, "Longer trading hours should help with a smoother absorption of shocks."