{"id":2196400,"date":"2022-05-30T19:59:01","date_gmt":"2022-05-30T10:59:01","guid":{"rendered":"https:\/\/www.nknews.org\/pro\/?p=2196400"},"modified":"2023-04-05T16:12:20","modified_gmt":"2023-04-05T07:12:20","slug":"the-korea-discount-why-south-koreas-stock-market-is-so-underpriced","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2022\/05\/the-korea-discount-why-south-koreas-stock-market-is-so-underpriced\/","title":{"rendered":"The Korea discount: Why South Korea\u2019s stock market is so underpriced"},"content":{"rendered":"
It is no secret that South Korea\u2019s stock market is underpriced. The world is in the middle of a big equity sell-off, but foreign and Korean investors have <\/span>fled<\/span><\/a> the Korean stock market more rapidly than other countries.\u00a0<\/span><\/p>\n The total value of all shares traded on the Korea Exchange is <\/span>lower<\/span><\/a> relative to total earnings (profits) and book value (total assets) than most other countries in the <\/span>Organization for Economic Cooperation and Development (<\/span>OECD) and most other emerging markets.\u00a0<\/span><\/p>\n South Korean securities have some disadvantages relative to European, American or Japanese stocks, as the country\u2019s currency is more volatile and the market is thinner (fewer trades, traders and less capital available). But this doesn\u2019t explain why its stock market would trade so poorly compared to even smaller markets with currencies of similar or lower status. There are also industry and firm-specific effects, with <\/span>banks<\/span><\/a> and <\/span>non-conglomerates<\/span><\/a> more heavily discounted.\u00a0<\/span><\/p>\n The problem is so long-standing that there is a term for it \u2014 the Korea discount. Observers attribute this to several Korea-specific factors: (1) geopolitical risks associated with North Korea, (2) the diversification of conglomerates into unrelated markets and (3) poor shareholder rights.\u00a0<\/span><\/p>\n The third factor appears to be the most important overall given available data, but heavy discounts for South Korean banks also suggests that poor growth prospects for the country overall, which will hit bank earnings, will start to exert downward pressure on stock values.<\/span><\/p>\n GEOPOLITICAL RISK<\/b><\/p>\n With North Korea right next door, it is not surprising that some analysts have wondered whether there might be a connection between the North Korean threat, including missile and nuclear tests, and the value of the South Korean stock market.<\/span><\/p>\n Recent research <\/span>indicates<\/span><\/a> that nuclear tests have short-term, negative effects on the value of non-defense South Korean share prices, though these effects were on average small (less than 1%). Older research indicates that changes in inter-Korean relations do not seem to <\/span>impact<\/span><\/a> patterns of foreign investment in South Korean stocks.\u00a0<\/span><\/p>\n Measuring the threat from North Korea is complex. Nuclear tests may be the most visible manifestation, but other forms of risk associated with North Korean threats and provocations have been <\/span>found<\/span><\/a> to raise Korean stock market volatility, and the informational advantage that South Korean investors enjoy also translates into <\/span>higher returns<\/span><\/a>. Specific stocks also <\/span>react<\/span><\/a> differently to positive North Korea-related news, with defense stocks shedding value and stocks in firms related to inter-Korean cooperation projects <\/span>rising<\/span><\/a> during periods of summitry.\u00a0<\/span><\/p>\n The literature on geopolitical risk and its impact on Korean stocks points to real, short-term effects, but it does little to directly explain why Samsung Electronics\u2019 stock is worth about one-third that of Apple by price-to-earnings ratio.\u00a0<\/span><\/p>\n