South Korea’s Yoon can kiss his stock reform goodbye

Shuli Ren, Bloomberg

South Korean President Yoon Suk Yeol has been touting a so-called corporate value-up plan to tackle the nation’s notoriously depressed stock market this year. After briefly declaring martial law late Tuesday, he can kiss that initiative goodbye.

Yoon is borrowing the concept from Japan, where a decade-long corporate governance reform is luring global investors back. Companies are encouraged to come up with plans on how to improve financial metrics, such as price-to-book or returns on equity. One approach is to name and shame firms that don’t attempt to make money for shareholders. The Korea Value-up Index, introduced in September, clearly takes a page out of Tokyo’s successful “shame index.”

If global investors were in a wait-and-see mode before, they can toss away Seoul’s proposal now. The short-lived martial law that stunned the world is a great reminder of what they dislike about South Korea: It’s a market full of billionaire family feuds and handshake deals. Foreigners are the last ones to find out what’s going on.

There are plenty of examples. Korea Zinc Co., a key metals supplier to the semiconductor and auto industries, is the best-performing blue-chip this year, up 228%. Its shares are doing well only because the two families that founded the company are in a heated fight for control, with each side holding more than 30% stake. Looking at the fundamentals, though, value investors that Seoul is trying to attract dare not touch this stock: The shares are 60% overpriced, according to analysts polled by Bloomberg, and trading is volatile.

Or consider Samsung Electronics Co., the crown jewel of Korea Inc. Jay Y. Lee, a third-generation heir, has been dogged by lawsuits and attacks from New York-based activist hedge fund Elliott Investment Management for almost a decade. Depending on which political party is in power, he’s been jailed and pardoned, and might be jailed again. But one thing is constant — he remains at the helm of Samsung.

With top management distracted, the once-dominant chipmaker has failed in strategic thinking. Samsung is falling behind in the AI boom because it underinvested in a niche product used with Nvidia Corp.’s processors. As a result, Korean equities are suffering from the most disappointing tech cycle since 1997, according to CLSA analyst Alexander Redman.

Of course, the K-drama award has to be given to Yoon, who has been struggling to implement his conservative political agenda against the opposition Democratic Party, which took control of the legislature in April. But was martial law a good idea? An impeachment is now on the cards, and political analysts at Teneo, a consultancy, worry that mass demonstrations could become a daily occurrence in Seoul, as we saw during former president Park Geun-hye’s impeachment crisis in December 2016.

Trading at only 8.4 times forward earnings, the benchmark Kospi index has rarely been cheaper. But valuation alone is not enough to lure foreign asset managers back. The $1.6 trillion market seems to be controlled by a handful of powerful men, who can move benchmark stocks out of whim and ego.

Instead of lifting up the stock market, Yoon is giving global investors one more reason to stay away.

Courtesy Bloomberg/Shuli Ren