[Yoo Choon-sik] Value-up program fails to lift stocks

South Korea’s stock prices fell for the past two consecutive months, pushing the main board’s benchmark index below its starting point for this year and faring worse than many indices in major countries worldwide. Moreover, the disappointing performance of the country’s share prices contrasts with some signs of improving economic growth in recent months.

The Korea Composite Stock Price Index, or Kospi, fell 2.1 percent in May after losing 2 percent in April. This follows a stellar 10 percent gain in aggregate during the rally in February and March, bringing the index nearly 1 percent below its level at the beginning of this year, according to Korea Exchange data.

The local stock market fared poorly compared to some of the world’s major markets. The three major US stock price indices posted gains of between 2.6 percent and 11.5 percent, while the MSCI World Index gained 8.7 percent so far this year. Kospi trailed even farther behind the Japanese and Taiwanese stock market indices, which rose by 15 percent and 19.2 percent this year, respectively, according to data from Investing.com.

In South Korea, the poor stock market performance contrasted with signs of recovery in the overall economy. Gross domestic product in the first quarter expanded by a seasonally adjusted 1.3 percent, marking the fifth consecutive quarterly growth and the fastest rise in more than three years, according to the central bank's official estimate released in late April.

Exports have been recovering fast from a 12-month consecutive run of year-on-year losses until September last year, driven by the upturn in the global price cycle of semiconductors and other information technology products. South Korea’s exports grew by 13.8 percent and 11.7 percent in April and May from a year earlier, respectively, after posting a gain of 8.3 percent in the first quarter, according to government data.

The fast pace of recovery has prompted major organizations, including the country’s central bank and the Organization for Economic Cooperation and Development, to upgrade their forecasts for South Korea’s economic growth this year. The poor stock market performance, in contrast with these rosy economic conditions, suggests that investors are losing confidence in the South Korean economy and financial markets.

In particular, the disappointing performance of South Korean stock markets may reflect an early failure of the country’s ambitious campaign to help share prices of major companies overcome a gap with their underlying value by removing or easing the obstacles, generally referred to as the "Korea discount." The Yoon Suk Yeol administration launched a corporate value-up program in February aimed at making investments in South Korean shares more attractive.

Since then, more details have been disclosed about the program through events such as news conferences by top policymakers, international seminars for scholars and market experts and research paper publications. However, these details appear to have failed to increase investor confidence in the program and South Korean assets as a whole, as seen in the stock price movements.

Investors realize that South Korea’s corporate value-up program relies mostly on voluntary efforts by companies to improve shareholder value. The government is either hesitant to provide strong enough benefits to persuade more companies to participate in the campaign or lacks efficient tools to make such efforts compulsory.

The crushing defeat in the April 10 parliamentary election has made Yoon the first president to lack majority backing in the National Assembly throughout his term, with his ruling People Power Party securing just over one-third of the seats. More seriously, there are few lawmakers who can side with the ruling party on key issues.

This means the government will have difficulty devising any policy requiring National Assembly approval, such as changes in the tax code to support the corporate value-up program. Making matters worse, the latest weekly opinion poll conducted by Gallup Korea showed that Yoon’s approval rating fell to 21 percent from 24 percent a week prior, marking the lowest score since his inauguration in May 2022.

Several companies have expressed their intention to take voluntary measures to improve shareholder value, such as promises to increase dividend payouts and make governing practices more transparent, since the government launched the value-up program. However, public disclosures under the new "value-up program" category have received a lukewarm response from investors.

Three of the 2,500-plus companies listed on the Kospi and Kosdaq markets issued public disclosures through the designated website on the corporate value-up program last week, but they were simply repeating information already known to investors or were too vague to affect investor sentiment, according to local media reports.

South Korea’s corporate value-up program is widely known to have taken its cue from a similar set of policy measures launched in Japan many years ago, which have since helped increase share prices significantly there. South Korean policymakers need to convince investors that they can do more than just copy the catchphrases used in Japan to make their stock markets more attractive.

By Yoo Choon-sik

Yoo Choon-sik worked as the chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. The views expressed here are the writer’s own. -- Ed.