Seoul hopes Japan stock playbook can narrow ‘Korea discount’

SOUTH Korea hopes to reflect Japan’s efforts to spice up the worth of its firms because the neighbour’s inventory market surges to a file excessive, with measures Seoul hopes will slim a “Korea discount” on inventory costs.

But whereas years of effort at pushing Japanese firms to be extra conscious of shareholders have helped elevate Tokyo shares above their 1989 “bubble”-era peak, the reforms floated final month by South Korean President Yoon Suk Yeol might not proceed to spice up the Seoul bourse, analysts say.

The benchmark Kospi index hit a greater than 20-month excessive this week on optimism over the “Corporate Value-up Programme”, to be introduced on Monday, however some market contributors are bracing for buyers to take income subsequent week. They suspect good points might not proceed past nationwide elections in April.

“At this stage, we can’t be sure how consequential the value-up programme will be for the corporate sector,” Societe Generale analysts mentioned. “What we can say with greater confidence is that the probability of a re-rating has increased.”

The analysts cited two encouraging elements that might make this programme totally different from earlier, failed reform efforts: the instance of Japan and better retail investor participation than the previous.

The reforms goal to unlock worth in South Korean firms, which have underperformed their international friends largely attributable to poor determination making and weak governance by the nation’s opaque chaebol conglomerates.

Yoon additionally needs to cheer home retail buyers, who’ve been heavy sellers of Seoul shares. Signs of reform have accelerated purchases by international buyers.

Corporate reform is a significant purpose Japan’s benchmark Nikkei inventory common broke its 34-year-old file on Thursday, marking a 17 per cent spike to this point this 12 months after surging 28 per cent in 2023.

Some analysts say Seoul’s programme, the most recent in a sequence of steps since late final 12 months, may present better upside potential than in Japan, however they warn that reforms will need to have tooth to make an actual impression.

Follow-up wanted

The measures will nudge listed firms with low valuations to report plans to spice up company worth, and can introduce an index of corporations with sturdy shareholder worth, the Financial Services Commission says.

The authorities is contemplating tax incentives to encourage firms to return extra to shareholders, the finance minister mentioned final week. Also deliberate are particular person financial savings accounts with tax breaks on dividend and curiosity revenue from native shares.

Some firms are responding. Hyundai Mobis, Samsung C&T, and SK Innovation are amongst corporations saying plans this 12 months to cancel 3.4 trillion received (S$3.5 billion) price of company-held shares – boosting share worth by decreasing provide – in contrast with 4.9 trillion received for all of 2023.

“Valuations could be boosted by at least 25% if we assume Korean deep value sectors drift towards even half the valuations of their Taiwanese counterparts,” HSBC analysts mentioned in a observe.

Monday’s measures will possible bolster confidence that South Korean reforms will be sustained, Morgan Stanley analysts mentioned, however with out follow-up the Kospi will probably be stored “range-bound but lean slightly to the downside due to some level of profit-taking, with the focus turning more to stocks that really matter on the reform drive”.

The Kospi rose 19 per cent final 12 months, underperforming the Nikkei and the US S&P500. In 2022, its efficiency beat solely Russia among the many Group of 20 large economies.

Domestic retail buyers bought a internet 13.8 trillion received (S$14 billion) of native shares final 12 months, their greatest sell-off in 11 years. So far this 12 months, they’ve bought 5.1 trillion received, whereas their purchases of file excessive US shares have greater than doubled from the identical interval final 12 months they usually have scooped up Japanese shares.

Foreigners, in contrast, purchased 11.3 trillion received of South Korean shares final 12 months and have already added 10.2 trillion received to this point in 2024 – 6.7 trillion received this month alone.

To maintain the momentum, the authorities ought to take into account requiring, not simply encouraging, change, analysts say. Hurdles embrace excessive inheritance taxes and better household possession of firms than in Japan.

“The government has come up with a well-drawn blueprint. Now it needs to bring carrots and sticks that will really change the companies,” mentioned Han Ji Young, an analyst at Kiwoom Securities. REUTERS