After Japan’s comeback, South Korea is hoping for its own stock market boom

Seoul is undertaking reforms to counter the so-called ‘Korea discount’ dragging down the valuations of its firms.

South Korea is trying to lift its stock market out of the doldrums [Jung Yeon-je/AFP]

Seoul, South Korea – Kim Gyeong-eob used to be a regular at bars and clubs in Hongdae, a popular university district and nightlife hotspot, drinking and enjoying live music with friends.

Then, in early 2020, COVID-19 brought Seoul’s raucous nightlife to an abrupt halt.

Suddenly, Kim, an IT engineer, was saving more money each month than he knew what to do with.

“I couldn’t use my money for drinks, and I thought ‘hmm … I can invest with the money I save.’ Somehow COVID became an opportunity for me,” Kim told Al Jazeera.

Since then, Kim has been a regular investor in the stock market.

Rather than chase a quick buck, Kim focuses on large established companies with modest but steady revenue streams.

So far, his slow and steady approach has paid off, earning him a tidy profit of about 7 million Korean won (about $5,100).

“Finding out what to invest in was very simple. I picked the big brands close to me, such as Samsung,” Kim said.

“Mostly I invest in semiconductors or something related to Nvidia or Samsung,” he added.

Kim is part of a growing trend of Koreans, many of them young, trying their luck investing in stocks.

Korea’s stock market capitalisation rose 23.1 percent from 2022 to 2023, with foreign investors making up nearly one-third of shareholders, according to the Korea Financial Investment Association.

The total number of shareholders of listed companies in South Korea almost tripled between 2016 and 2022 to almost 14.5 million, according to the Korea Capital Market Institute.

South Korean corporate giants such as Samsung are undervalued compared with their global peers [Ahn Young-joon/AP]

Despite hosting globally renowned brands such as Samsung and Hyundai, South Korea’s stock market has long been neglected by domestic and foreign investors alike.

The dominance of family-run conglomerates known as “chaebol”, poor corporate governance, poor returns for shareholders and tensions with North Korea have all been blamed for the so-called “Korea discount” – the name given to the persistently low valuations of corporate giants in Asia’s fourth largest economy.

Last month, the US investment bank Goldman Sachs said stocks in the country’s three biggest K-pop management agencies could be undervalued by 85 to 137 percent, and highlighted the industry as being “ripe for a turnaround”.

“Korean stocks tend to be undervalued compared to their peers even when businesses are very similar,” James Lim, a senior analyst for the Asia equity research team at Dalton Investments, told Al Jazeera.

After years of lacklustre returns in the local stock market, the South Korean government is now attempting to banish the Korea discount once and for all.

In February, officials announced the launch of the Corporate Value-up Programme aimed at encouraging companies to share more of their profits with shareholders.

The proposed measures include tax benefits to incentivise companies to boost their shareholder returns and capital efficiency, and the launch of a Korea Value-Up index to highlight better-performing firms.

The move is widely seen as taking a leaf out of the playbook of neighbouring Japan, where regulatory reforms have been credited with boosting the Nikkei 225 to record highs after decades of stagnation.

Emulating Japan’s success, though, could prove to be a challenge.

Although South Korea’s Financial Services Commission has pledged to roll out “much stronger” incentives than those offered in Japan, the proposals have so far largely failed to impress investors.

The benchmark Kospi index dropped 0.77 percent on the day the programme was announced amid criticism that the proposals were overly vague, relied on voluntary participation, and failed to address the root causes of the Korea discount, including high inheritance taxes that encourage chaebol owners to keep share prices low.

Japan’s Nikkei 225 has surged to record highs after decades of stagnation [Eugene Hoshiko/AP]

Park Young-gul, a partner at the investment advisory company KPMG, said that while the government’s reforms were a positive first step, more needed to be done to enhance the attractiveness of Korean companies to investors.

“I believe that for this issue to be fundamentally resolved in the future, concrete policies need to be continuously implemented, particularly in terms of tax incentives and strengthening shareholder rights,” Park told Al Jazeera.

Dalton Investments’s Lim said a “lot more” incentives and penalties would be needed to force companies to change.

“The controlling shareholders control the company, and if they feel that there is no need to payout meaningful amounts of dividends, then minority shareholders would suffer,” he said.

“This could be because the controlling shareholders want to keep the share prices low so that they could save inheritance taxes, et cetera.”

Lim said measures such as tax cuts will be difficult to implement after the centre-left Democratic Party won 175 of the 300 seats up for grabs in last month’s National Assembly elections.

The outcome means conservative President Yoon Suk-yeol, who has spearheaded efforts to revitalise the stock market, would need the support of opposition lawmakers to pass any legislation that supports his pro-business agenda, which includes a proposal to scrap capital gains tax on shares.

“This reform will not be a fast and smooth ride,” Lim said.

In the meantime, Kim, the small-time investor, is not deterred by the low prices of Korean stocks and is focused on investing most of his salary “for a better future”.

“If I can retire when I turn 40, that would be amazing,” Kim said.

Source: Al Jazeera