[Inside Chodong] The Korean Stock Market Rallies, But Why Are Foreign Investors Still Unconvinced?

"This time is different." This phrase has been repeatedly proclaimed with every new administration in South Korea, always accompanied by calls for "capital market reform." Yet, despite the recent KOSPI rally, many overseas investors still seem to find these words hollow. How did South Korea come to be perceived as the "boy who cried wolf" in the global capital market?

David Roche, the renowned investment strategist and founder of Quantum Strategy, who previously worked on Wall Street, recently gave an interview in which he did not hide his overt "distrust" of the Korean market, even in light of this year's KOSPI rally. Now based in Singapore, Roche was the first on Wall Street to predict the 1997 Asian financial crisis, and he has been closely monitoring the Korean market in real time, to the extent that he advised investors to remain calm immediately after the National Assembly passed a resolution to lift martial law in December of last year. However, he still has not invested a single penny in Korean assets or currency.

The reason is simple. He believes that the chronic "Korea discount"-the undervaluation of the Korean stock market-remains far from being resolved. This skepticism is neither a one-off nor unique to Roche. Having served as a prominent investment strategist for decades, Roche stated emphatically, "As someone who has experienced 'countless' false dawns regarding chaebol reform, I can no longer trust Korea based on words alone." Although the capital market revitalization efforts of the Lee Jaemyung administration have recently led to net foreign buying and KOSPI reaching record highs, Roche does not believe the current reform momentum will be sustained.

This sentiment echoes the remarks made by Lee Namwoo, chairman of the Korea Corporate Governance Forum, after meeting individually with over 50 overseas institutional investors in Hong Kong, Singapore, and elsewhere. Chairman Lee noted that he had rarely seen such intense interest from foreign investors in capital market reform, but he also shared, "With each meeting, I was increasingly shocked. The 'wall of distrust' exceeded anything I had imagined." Even he, who had anticipated a certain level of skepticism due to the previous administration's reversal on commercial law amendments and the abrupt ban on short selling, was taken aback by the extent of the distrust.

Common practices in the Korean market-such as circular shareholding, indirect control, and related-party transactions-are cited as running counter to global standards. This has led to widespread concerns that the interests of corporate owners will be prioritized over shareholder value. Separate from the new administration's moves to improve governance, there is deep skepticism that, until various legislative measures are firmly established, all kinds of loopholes will be exploited. The "mandatory cancellation of treasury shares" principle, which is considered the strongest among the supplementary legislative proposals for enhancing shareholder value, has been highly praised. However, what have companies actually done recently? There has been a surge in the issuance of "last-minute exchangeable bonds (EB)" aimed at circumventing the mandatory cancellation of treasury shares. Dozens of companies, including KCC, have disclosed decisions to dispose of treasury shares through EB issuance.

The recent KOSPI rally is certainly a welcome development. However, it must never be forgotten that the market operates on trust. When trust collapses, numbers lose their meaning. For the Lee Jaemyung administration, which has pledged not just to revitalize but to "normalize" the capital market, what matters most is not the next new measure, but consistent policy implementation. Only when both the government and companies repeatedly prove their commitment to improving governance and shareholder value through concrete action will the stigma of being the "boy who cried wolf" finally be erased. The persistent Korea discount will also disappear only after that.