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The tiger that lost its roar: the mystery of South Korea’s underperforming equities


9 November 2023 |
Active ESGMacro
Two countries in the MSCI Asia ex-Japan Index – China and South Korea – have performed noticeably poorly over the last decade and a half. One can explain China’s struggles, amid tensions with the West. But what is going on with South Korea?

Figure 1: South Korea and China benchmark indices vs. the US

Of the 10 countries that comprise the MSCI Asia ex-Japan Index, the poor performance of two of the larger countries over the last decade and a half is notable. 

One can understand China’s poor performance. Over the relevant period there has been a deterioration in its relationship with the West. Investors are increasingly questioning  whether China is entering a period of lower growth as structural imbalances, such as its outsized and overheated property sector, depress related sectors and spread negative sentiment to others. The limits of state growth planning have also become an area of concern.

But what explains South Korea’s poor corporate performance? The country’s stocks have also derated, with the average price-to-book multiple now below one1.

Many investors are aware, in general terms, of South Korea’s reputation for poor governance; and the so-called ‘Korea discount’, where local companies persistently trade at lower valuations than their global peers.

Besides cheap valuations, other anomalies abound. South Korean preferred shares – essentially non-voting common stock – trade at discounts to voting stocks of as much as 50%. Holding company discounts to the sum of their parts often exceed 65%. Stocks bought back by companies, uncancelled and held in treasury, can be as high as 40% of shares outstanding2. And pay-out ratios for even cash-rich profitable companies are often below 15%3.

Many listed companies in South Korea have volatile earnings tied to economic cycles – which can attract lower valuations. But the persistence of cheap valuations on offer in the country, coupled with the anomalies referred to above, have led us to assess the extent to which the mistreatment of minority shareholders may also be to blame.  It’s an issue we will expand upon in an upcoming report.

For more information on Asia ex-Japan Equity please click here

1 As at 4 October 2023, per Bloomberg, the Kospi Index traded at a price-to-book multiple of 0.89 times.

2 Bloomberg as at 31 October 2023.

3 As at 4 October 2023. A dividend pay-out ratio is the proportion of earnings paid out as a dividend.

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