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).

Investors in Hong Kong and mainland Chinese stocks have been waiting a long time for the market to stop falling. In April we saw the beginnings of a tentative rebound, spurred by the announcement of shareholder-friendly reforms by the China Securities Regulatory Commission and positive macro / earnings headlines, but hopes were dashed soon after as the rally lost steam.

Now we have another attempt by Hong Kong / mainland China to break out of its multi-year bear market. The catalyst seems to be a monetary stimulus package announced by the People’s Bank of China (PBOC) on 23 September. It includes:

1. lowering reserve requirement ratios by 0.5pp and the main policy interest rate by 0.2pp, with further cuts possible by year-end;
2. cutting mortgage rates for existing home loans by roughly 0.5pp and reducing the nationwide minimum down payment requirement for second homes from 25 percent to 15 percent, while increasing funding support for converting excess housing inventory into affordable housing; and
3. supporting the stock market by allowing institutional investors to borrow liquid assets directly from the central bank to invest in equity markets, while lending to banks supporting companies to buy back their own shares.

This has had a dramatic impact on sentiment in the Hong Kong and mainland Chinese markets, causing the Hang Seng and CSI 300 indices to rally by 15.8% and 25.1% respectively from the announcement to 1 October.

Even after the rally, we still see valuations as low, at least in the Special Administrative Region. Figure 1 shows how the forward price-to-book ratio of the Hong Kong market is still not far above a twenty-year low at 1.0x.

Figure 1: Hong Kong forward price-to-book ratio, last twenty years

Across the region, Hong Kong is still one of the cheapest markets in terms of price-to-book and price-to-earnings ratios (figure 2) and it is significantly cheaper than mainland China.

Figure 2: Asia-Pacific market price-to-earnings and price-to-book ratios, 1 October 2024

Given the divergence in valuations between Hong Kong and the rest of the region, relative value strategies which take positions in Hong Kong versus other markets should continue to perform well if the rally continues, and the consequent volatility and dispersion should create more shorter-term trading opportunities.

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.