According to the South Korea Exchange, share buybacks jumped 25% from a year ago in the first half of this year. Treasury share cancellations, the removal of shares bought back by the company from its balance sheet, saw an even more dramatic surge, increasing by 190% over the same period. A main driver has been the Corporate Value-Up Program, introduced in February this year, which aims to enhance corporate governance and shareholder value through improved disclosure practices, dividends, and buybacks. We expect this initiative to benefit Korean equities over the longer term.
Korea is following in Japan’s footsteps with these reforms, drawing inspiration from Japan’s successful corporate governance initiatives which were drawn up a decade ago and ramped up further last year. The “Korean discount,” where South Korean companies trade at lower valuations than their emerging market peers despite their innovation in sectors like semiconductors and technology, has been a persistent issue for years. This discount is largely due to weaknesses in corporate governance, poor treatment of minority investors, and the dominance of Chaebol structures, which involve cross shareholdings and family control of businesses. Addressing these issues through corporate reforms will be key to unlocking higher valuations. The 10-year average P/E and P/B of the MSCI Korea Index are 12.8x and 1.1x respectively, lower compared to 13.9x P/E and 1.6x P/B for the MSCI Emerging Markets Index.
To further support the program, Korean regulators plan to launch a Value-Up Index and associated ETFs in September, along with annual awards for best-in-class corporate governance performers in 2025. This index will include companies demonstrating best practices and is expected to attract significant investment inflows, estimated by J.P. Morgan to be around USD 1.4 billion. Additionally, the government earlier this month announced tax incentives for companies adhering to the program, further encouraging corporate participation and boosting market confidence. In conclusion, we view the combination of improved corporate governance, supportive regulatory initiatives, and attractive valuation metrics as major tailwinds for Korean equities over the long run. Investors with a longer investment horizon may want to consider making a modest allocation to this emerging Asian market.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.
The MSCI Korea Index is designed to measure the performance of the large and mid cap segments of the South Korean market. With 98 constituents, the index covers about 85% of the Korean equity universe.
The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
