In Korea, it was good to see the second set of amendments to the Commercial Act passed on 25 August. Listed companies with assets exceeding two trillion won will now have to adopt cumulative voting, making it dramatically easier for minority shareholders to get at least one candidate onto the board.

The next set of amendments to the Commercial Act, scheduled for later this year, will include the mandatory cancellation of treasury shares.

Treasury shares have been a focus topic in the Korean market since Lee Jae Myung initiated his presidential campaign, with a basket of treasury share-heavy holding companies beating the index by around 25% at one point (figure below).

Performance of a basket of holding companies with large treasury share holdings, May 2025 to present

The reason is that, in the past, treasury shares have often been misused to defend management rights against hostile takeovers or shareholder activism. Consequently, the ruling Democratic Party of Korea is proposing that companies must cancel their treasury shares within a certain timeframe, which has not been determined yet but is likely to be immediate to one year for newly-acquired treasury shares, and six months to five years for existing holdings.

Korea’s business community has inevitably voiced strong opposition to these measures, arguing that treasury shares are a strategic tool for defending management control, such that rapidly cancelling decades’ worth of accumulated shares would be not only impractical but would also leave companies exposed to foreign hostile takeovers.

Given the progress made to date on other reform measures, Metrica is reasonably confident that the government will be able to push through the treasury share cancellation bill with timeframes on the shorter end. This will improve transparency in the market and reduce the ability of companies to use treasury shares for illegitimate purposes.

Some companies have already been ramping up cancellations (figure below), spurred by the “Value-up” initiatives of former President Yoon and an increased focus on corporate governance by domestic investors.

Treasury share cancellation announcements by listed firms in South Korea

Korea’s President Lee is a month into his term, and so far he has remained admirably focused on promoting the “KOSPI 5000” agenda.

A long-awaited bill to reform the Commercial Act just passed the National Assembly as this newsletter went to print, and it includes provisions expanding the duty of care of corporate directors from “companies” to “companies and shareholders”, mandating electronic general shareholder meetings for large companies and limiting the voting rights of shareholders and related parties to 3% when electing audit committee members.

By implementing these reforms, the government is acting against the express wishes of the chaebols, who have campaigned loudly against them. It is strong evidence that the incoming administration is able to get things done. It also reflects recognition that, with almost a third of Korean people having brokerage accounts, anyone threatening to derail the stock market’s 30% year-to-date rally would be playing a dangerous game.

Taxes are another area of focus. Following the discussions on inheritance tax changes for listed shares – outlined in last month’s newsletter – the government is turning its attention to dividends.

Currently, all financial income including dividend income is taxed at 15.4% below KRW 20 million, and at progressive rates of up to 49.5% above KRW 20 million. The National Planning Committee and Ministry of Economy and Finance are considering eliminating the progressive rate schedule so that everything is taxed at 15.4%.

Historically, chaebols have been reluctant to pay anything more than nominal dividends to their owners due to the high tax burden. If President Lee’s dividend tax reform goes ahead, it should encourage operating subsidiaries to raise payouts, which would be positive for the valuations of the listed holding companies that own them.

It is proving to be a very busy year for Asia-Pacific M&A, with the number of deals on track to exceed 300, comfortably exceeding the previous peak of 242 (figure below). Hong Kong, Singapore and Japan have shown the greatest leaps in activity, with run rates of 3.5x, 3.0x and 2.1x the post-2009 average, respectively.

Announced M&A deals with target listed in Asia-Pacific, 2009 to present

Japan remains an area of particular interest. This year’s surge in dealmaking seems mostly driven by two Tokyo Stock Exchange initiatives:

1. In February the exchange published a presentation containing views sharply critical of listed parent-subsidiary structures8. Since then at least $50 billion of clean-up transactions have been announced, including NTT / NTT Data, Toyota Industries / Toyota Motor, KDDI / Kyocera and Aeon / Aeon Mall. Japan still has more than 200 listed subsidiaries9 so there is plenty more to be done on this front.
2. Next month the exchange will significantly tighten protections for minority investors in going-private deals10. A broader range of deals will now be caught by the requirement to obtain a special committee (SC) opinion. The SC will now have to consider whether any increase in corporate value will be fairly distributed to minority shareholders. The new rules also require greater transparency for any valuations performed in the analysis.

Some acquirers are clearly taking advantage of the rush to get deals done at very low prices, and a number of these situations offer interesting optionality, according to Metrica’s analysis.

The result of the Korean presidential election came in just as this newsletter went to press. Metrica was pleased to see Lee Jae-myung win the race by a comfortable margin. Mr. Lee’s campaign platform included a large number of pledges to improve Korea’s corporate governance and stock market functioning, including:

• Improving corporate governance transparency
• Revising the commercial act to expand corporate directors’ fiduciary duties beyond the company to include shareholders
• Ensuring that cumulative voting cannot be excluded by the articles of incorporation
• Ensuring that new shares are allocated to existing parent company shareholders (including minority shareholders) in the event of a split-off listing
• Implementing policies which institutionalise the mandatory cancellation of treasury stocks by listed companies, ensuring these shares are returned to shareholders as a benefit
• Setting a mandatory independent director ratio for companies of a certain scale, ensuring certain level of independent oversight
• Gradually expanding the separate election of audit committee members for large listed companies
• Implementing electronic voting for large listed companies
• Introducing of advisory shareholder proposals
• Implementing fair price framework that considers stock prices, asset values, and revenue values when determining the acquisition or merger prices for publicly listed companies
• Implementing mandatory public purchases to share management control premiums and guarantee opportunities for minority shareholders to redeem their shares during company acquisitions
• Implementing system allowing minority shareholders to request an examiner through the courts when merging publicly listed companies and their affiliates
• Strengthening monitoring and sanctions against unfair internal transactions Importantly, Korea finally has a president and majority government from the same party. For the first time in three years, the government will be able to progress its legislative agenda without being constantly hindered by an uncooperative veto-holder.

A bill submitted by Korea’s ruling Democratic Progressive Party with the firm support of the incoming president could have a significant impact on the valuations of certain listed companies.

It seeks to remove the incentive for major shareholders deliberately to depress their companies’ share prices around succession events.

Currently, inheritance tax for listed companies is calculated using a four-month average of the share price around the time of the transfer. This has led to companies conducting deeply-discounted rights issues, intra-group transactions or mispriced mergers, intending to drive the price down and thereby minimize inheritance taxes.

By contrast, for unlisted companies, inheritance tax is determined using a blended average of earnings value and net asset value. If the blended average amounts to less than 0.8x net asset value (NAV), then 0.8x NAV is used as the floor valuation.

The proposed bill would apply the unlisted company formula to listed companies in cases where the listed company’s shares are valued at less than 0.8x NAV.

At the same time, for companies trading above 0.8x NAV, a 20% surtax for controlling shareholders would be removed and it would also become possible to pay the tax bill in stock rather than just cash.

In Metrica’s view, the heavy burden of inheritance taxes is a primary cause of the “Korea discount”, depressing valuations for the whole market but particularly for conglomerates, which have reached valuations as low as 0.2x or 0.3x NAV. So to the extent that this bill succeeds, it could create a very powerful rally in the affected names.

The long-awaited impeachment trial verdict in Korea is due the day after this newsletter goes to press. If the impeachment is upheld, a presidential election must be held within sixty days. A victory for the opposition candidate Lee Jae-myung, who narrowly lost to President Yoon in the last election, would have positive implications for the market, as it would allow the Democratic Party of Korea (DPK) to push through its corporate governance reform agenda unhindered. Conversely, a continuation of the status quo whereby the People Power Party holds the presidency and the DPK controls the National Assembly would be less favourable, as it would prolong the political stalemate. Even so, much progress was made on Yoon’s “Corporate Value-up” initiative in 2024 under essentially the same structure, and we would expect the governance reform momentum to continue in any case. It is worth remembering that Japan was able to achieve significant progress towards the same goals through non-legislative measures.

Korea’s government and main opposition party continue to push their respective stock market and corporate governance reform agendas. The vice-chairman of the Financial Services Commission (FSC) appeared at several conferences in February to highlight the government’s continued commitment to “Value-up”. On one measure – share buybacks – Value-up is already proving to be a success, with Korean companies increasing buybacks by 72.8% year-on-year to $9.8 billion in 2024. However, both the FSC and Korea Exchange want to boost the number of listed firms releasing general Value-up plans beyond the current 114. As such, the government is promoting a bill to reduce corporate taxes for companies practising Value-up and to lower dividend income taxes for investors in such firms.

On the opposition side, the Democratic Party of Korea (DPK) has been pushing through its amendment to the Commercial Act which makes company directors answerable to shareholders as well as companies.

The bill is likely to be presented to the National Assembly in March. Both the government’s and the opposition’s bills face obstacles given Korea’s turmoil, but the important point is that both ends of the political spectrum want to see the stock market higher.

As such, if the presidential impeachment issue is resolved soon (current projection is mid-March) and stability returns, via elections or otherwise, it should be a positive for the reform programme.

In the meantime, another upcoming catalyst for the market is the lifting of the short-sell ban at the end of March.

Metrica believes that the 15-month ban has hurt the market’s liquidity and depressed valuations, to the extent that Korea is now the only market in Asia-Pacific trading below book value and one of two below 10x earnings (figure below).

Asia-pacific market price-to-earnings and price-to-book ratios, 28 February 2025

Looking at the relative value universe presents a similar picture, with Korea spreads on average far wider than anything else seen in the region. If the original objective of this ban was to support the stock market, it has been unsuccessful. During the period since the ban was enacted, the Korean market has returned exactly 0.0%. By comparison, markets which freely allow short-selling such as the US, Europe and Japan have returned 36.4%, 31.4% and 13.6% respectively over the same period. MSCI also cited the short-sell ban as a reason not to upgrade Korea to Developed Market status.

There is always a risk that, given the depressed state of the Korean market, the ban will be extended yet again. However, Metrica is cautiously optimistic that the authorities will do the right thing. A resumption of short-selling should draw capital back into the market, and in particular into some of the more extreme spreads that can be found in the RV universe.

Minority shareholder protection

It was good to see the Korea Exchange following though on its commitment to protect minority shareholders in the case of spin-off re-listings. Binggrae, a manufacturer of dairy products, was forced to withdraw its plan to split into a holding company + operating company after the exchange refused to approve the listing of the new company. This is historic as the exchange has previously waved through such restructurings.

In the past, majority owners of Korean companies loved to convert them into holdcos + opcos, as this allowed them to take capital out while maintaining control. It also depressed the prices of holdcos, lowering potential inheritance taxes. Perhaps the Binggrae case is a sign that Korea is finally starting to move on from this abusive and outdated practice which is no longer tolerated by any developed market globally.

RV spreads have been drifting wider since May 2024, and on one measure — the ratio between MSCI Value and Growth indices — levels are now back to multi-year extremes (figure below).

MSCI Asia-Pacific Value / Growth

Unusually, this has been happening during a time when US short-term and long-term rates are moving higher, a trend which is normally associated with outperformance of short-duration stocks (Value) over long (Growth). It means that either equity investors are ignoring the consequences of higher rates, or they are revising up growth expectations at a pace fast enough to outweigh the impact.

In any case, companies which are valued not on discounted cash flows but on hard assets – such as those in certain RV strategies – are now cheap again. But given that we have retraced back to the low point on the chart, can we expect a brighter period ahead for RV?

We believe that two recent developments have raised the probability in favour of “yes”.

The first is the release of the R1 large language model by Chinese AI firm DeepSeek. The seemingly rock-bottom development cost of this model has called into question the potential returns on the estimated one trillion dollars2 already invested or to be invested into generative AI. The concern is: if good quality models can now be created on the cheap, do we really still need all those Nvidia chips, power transformers and data centres?

The news significantly boosted the volatility of stocks in the space, and we expect this to continue, which should be a positive for RV strategy returns.

The second development is the threatened or actual imposition of tariffs by the US upon its trading partners. While on the face of it this should not be a great surprise given the record of the previous Trump administration, it may have unexpected consequences for inflation this time around. During the last episode, we had been through thirty years of declining prices, leaving companies barely able to pass on tariffs to their customers. This time however, the macroeconomic environment is clearly different. An upside surprise to inflation would result in higher volatility in long-duration stocks which naturally tend to be more sensitive to rate expectations.

This would have an even greater impact on RV performance given that it affects all long-duration securities – not just AI-related.

Event-driven outlook

We begin 2025 with a survey of current opportunities in Metrica’s core strategies.

Firstly, in the event-driven (hard catalyst) strategy, one of the key performance drivers is the liquidity of the target universe, as it correlates with the frequency and depth of trading opportunities.

Figure 1 shows, as of the beginning of each year, the average daily turnover of M&A targets listed in Asia-Pacific (the coloured bars) or listed outside Asia-Pacific but where the acquirer is paying in shares listed in Asia-Pacific (the grey bars marked “Other”).

Figure 1: Daily liquidity of Asia-Pacific M&A deals at start of year, 2018 to date

The chart shows how daily liquidity in the Asia- Pacific M&A universe has improved to a post-2019 high of $641 million, and is 77% higher than a year ago.

Japan has driven much of the increase, which is not a surprise given sustained low-interest rates, corporate succession issues and a resurgent investor focus on balance sheet inefficiencies and governance reform. With many deals subject to upside tension from competitive bidders and/or shareholders unhappy with low-balled terms, Japan should continue to provide a key source of opportunities in the event-driven space.

Similarly, Hong Kong continues to see healthy deal activity, although in this case it is largely from major shareholders seeking to privatise companies at historically cheap valuations, with a view to relisting elsewhere. Many transactions are driven by state-owned enterprises (SOE), and in this regard we were pleased to see the recent guidelines for SOEs published by the State-owned Assets Supervision and Administration Commission (SASAC), which explicitly mention share price performance and valuation as criteria for manager evaluation. The guidelines should incentivise more SOEs to tackle the under-valuation of their Hong Kong-listed shares, creating further trading opportunities in this market.

RV outlook

Turning to the relative value strategy, we first update the value vs. growth draw-down chart featured in past newsletters (figure 2). As a reminder, the french series is Professor Kenneth R. French’s dataset of US stocks which goes back almost one hundred years, and the mxap series is based on MSCI Asia-Pacific which has less history but which is more applicable to the fund’s core universe.

Figure 2: Draw-down from peak return for value vs. growth, 1926 to present

The chart shows the extent to which value investing (and by extension, RV investing) is or is not working4. It can be seen that, following a very steep draw-down in 2020, value has retraced around one-third of its way back to the long-term path. Longer-term, there is still around 40%+ upside to reach the 0% level.

The retracement trend paused a little over the past year as momentum factors took over. By some measures, 2024 was a record year for momentum strategies5, with the US stock market in particular posting its largest two-year gain since 1998.

While it is obviously difficult to call the top of any trend, it would be quite unusual by historical standards to see this extend into a third year. As such, the value factor may come back into favour in 2025, with positive implications for relative value strategies.

Nevertheless, given the partial retracement of value performance, does this mean that the best days are already over for RV strategies?

“Not at all” would be our answer. Looking at a weighted average discount to fair value for a representative sample of RV names shows how it ended 2024 at roughly the same level as it reached 30 months ago (on 17 June 2022 – dashed line in figure 3 – note the reversed axis), despite the value factor rebound.

Figure 3: Weighted average discount to fair value of sample RV names (discount compression trades), 2022 to date

Korea Exchange released the details of its long-awaited Korea Value-up index.

As expected, not one non-financial holding company was included in the index, although many listed subsidiaries were. This was not a surprise to us, as we have not seen wholehearted participation in Corporate Value-up (CVU) by any of the nonfinancial holding companies with the exception of LG Corp. We expect this to change over time following pressure by investors, regulators and the stock exchange.

The index constituent announcement had a mild impact on the related stocks. Prior to the announcement, the performance of constituents and non-constituents was similar (figure 1). Subsequently, constituents then outperformed the others by around 2%.

Figure 1: Korea Value-up index constituent performance before and after the announcement, compared with non-constituent KOSPI 200 index members, equally-weighted

Meanwhile the valuations of listed non-financial holding companies are still pricing in very low expectations for CVU.

Figure 2 shows the discount to listed NAV (ignoring unlisted assets) of the most liquid Korean holding companies with at least 200% of market capitalisation made up of stakes in other listed companies. While discounts contracted in early 2024 thanks to the initial CVU announcements, this move was quickly reversed and the group now trades 15pp lower than it did less than two years ago.

We view this as an attractive level to be exposed to corporate governance improvements in Korea (CVU or otherwise), and the fund maintains a larger-than-normal gross exposure to the market.

Figure 2: Discount to listed assets of Korean holding companies, January 2023 to present (Includes companies trading at greater than 50% discount as of end date).