Korea continues to be a key focus. Foreign investors are still generally quite sceptical on the prospects for the Value-up programme, with fewer than 30% expecting it to have a meaningful impact Principal reasons are the perceived inability of the government to pass legislation due to its minority position combined with the structural impediment of an equity market dominated by majority shareholders that seemingly don’t care about share prices.
This scepticism is well-reflected in the prices of potential Value-up beneficiaries such as listed holding companies, which on aggregate are still trading at around start-of-year levels. Very little is priced in, in other words.
Against this backdrop, we continue to maintain our constructive stance. Companies have started to release Value-up plans, targeting higher shareholder value through share buybacks, treasury share cancellations, enhanced dividend policies etc. Although the pace has so far been slow, regulators and others have started to apply gentle persuasion to the laggards. A few days ago, both the Financial Supervisory Service and Financial Services Commission publicly called on companies to speed up their participation in Value-up. The CEO of Korea Exchange (KRX) also met the leaders of the ten largest conglomerates to convey the same message.
In response, LG, Hyundai, POSCO and Kia have committed to publish their Value-up plans in 4Q. We expect that peer pressure will motivate the others to follow in due course – failing which, the pressure from the government, regulators and investors may become a little less gentle.
We acknowledge that the Value-up related tax incentives bill to be submitted to the National Assembly this month will quite likely run into hurdles due to the government’s minority position. However, with the opposition party also aiming to tackle the “Korea discount”, as evidenced by their recent release of a rival plan (the “Korea Booster Project”), we can ultimately expect support from the legislature in one form or another.
In any case, looking at the Japanese example, it has been the efforts of the stock exchange4 rather than the government that have had the greatest impact on market valuations. So even if the legislative effort stalls, we believe Korea can still make further meaningful progress towards a more minority investor-friendly stock market.
In addition, we still have other upcoming catalysts such as the launch of the Value-up index in September and associated exchange-traded fund shortly after.