Durable. Notre engagement.

Where next for the rally?

market snapshot

1 March 2024 |
Three key equity markets hit all-time highs this week as the risk-on mood broadened beyond the US and into Asia-Pacific (APAC) indices.
Asia ex-Japan Letter to Investors (for more on South Korean corporate governance)

Fast reading

  • Equities continued to climb this week helped by the afterglow of a helpful earnings season and in-line inflation data.
  • The Nikkei 225 Index reached past its previous high, which itself surpassed the index’s all-time high-water mark set in 1989. The S&P 500 and India’s Nifty 50 also broke new ground.
  • In South Korea, regulators announced plans to limit the power of controlling shareholders.

The S&P 500, the Nikkei 225 and India’s Nifty 50 all hit record highs this week as investor optimism percolated beyond the narrow list of companies involved in the ‘Magnificent Seven’ rally.

Inflation data helped buoy the mood, with broadly in-line reads from the US and the eurozone suggesting both economies are still on course for interest rates to be cut later in the year.

The Nikkei has outpaced the S&P 500 and the KOSPI over one year

Louise Dudley, Portfolio Manager for Global Equities at Federated Hermes Limited, notes the disparity between the recent strong performance of the Nikkei 225 and the Nifty 50 and other Asian indices, particularly China.

On the former, she notes a weaker Japanese yen and a solid earnings season has helped returns. “The depressed yen will help the export-heavy Japanese economy grow as geopolitics sends supply chains looking for the right balance of cost and security,” she says.

The situation in Japan contrasts with China, says Dudley, where the focus is on enacting reforms aimed at preventing further market tumbles. “There will, however, be a bottom for Chinese stocks and as the market settles we believe there will be many good companies at bargain prices,” she adds.

Hong Kong’s Hang Seng Index has returned -2.5% year to date.1

These controlling shareholders will not be easily persuaded to act against their own interests

Another lacklustre APAC equity index is South Korea’s KOSPI, which has underwhelmed year to date with a -0.4% return.2 For Jonathan Pines, Head of Asia ex-Japan at Federated Hermes Limited, this illustrates a historic tendency for South Korean stocks to underperform versus peers.

Although South Korean regulators have announced measures to address the so-called ‘Korea discount’, they do not go far enough, according to Pines.

“The plan announced in South Korea earlier this week aimed at boosting corporate value was disappointing,” he says. “It was short on details, but more to the point misunderstands the incentives of controlling shareholders. Indeed, the proposals seem designed with the aim of not upsetting South Korea’s controlling shareholders.”

Will they, Won('t) they?

In Pines’ view, more attention should be paid to reducing the power of controlling shareholders to exploit minority shareholders. At a minimum, this should include establishing in law a directors’ fiduciary duty of care, introducing a ‘tag along’ right for minority shareholders in the event of a takeover, ending compelled share swaps, requiring minority approval for related party transactions, requiring cancellation of excess treasury stock, and requiring companies to provide an annual governance statement.

“Current regulations have enabled controlling shareholders in the past to benefit financially from keeping stock prices low and mistreating minority stockholders,” adds Pines. “By repeating their past behaviour they stand to repeat these gains. These controlling shareholders will not be easily persuaded to act against their own interests.”

Under its ‘Corporate Value-up Programme’ announced on Monday, South Korea’s Financial Services Commission said companies prioritising shareholder returns will receive incentives and tax benefits. The full guidelines for the programme will be finalised in June, the financial regulator said.

For further insights on global equities, please see our Global Equity ESG, Annual Report 2023.

Asia ex-Japan Letter to Investors (for more on South Korean corporate governance)

Asia ex-Japan Letter to Investors (for more on South Korean corporate governance)

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