Improving Shareholder Returns

Is South Korea Starting a Trend in Emerging Markets?

02 May 2024

6 min read

Stuart Rae| Chief Investment Officer—Emerging Markets Value Equities

Governance issues have long been a source of concern in emerging markets investing, but over the past decade, a persistent focus on capital management, disclosures and shareholder friendly policies in Japan have created a blueprint that South Korea is now trying to emulate. Can the South Korean market emulate Japan’s success? And who’s next?

After decades of slow growth and undervaluation, Japan introduced a corporate valuation program in 2014 to increase domestic equity ownership through a mutually beneficial “cycle of growth and asset income”. The program encouraged all Japanese companies with a price to book ratio (P/B) of less than one to boost corporate value - prompting companies to improve their governance structure, enhance transparency and implement an institutional stewardship code. Although it has taken some time to see the impact, this set of initiatives is leading to a revaluation of low P/B companies, and is acknowledged as an important factor behind the rise of the Japanese stock market to record highs (Display).

Proportion of Cheaply Valued Companies by Market

Percent of Companies Valued at Less than 1x Price-to-Book

Current analysis and forecasts do not guarantee future results.
South Korea represented by KOSPI 200, Japan by TOPIX, Europe by STOXX 600 and US by S&P 500.
As of March 31, 2024
Source: FactSet and Goldman Sachs Global Investment Research

Now the success of Japan’s market reforms appears to have galvanized the South Korean government and stock market regulator into action.

South Korea ranks just behind Australia in world GDP rankings (9th overall). With a population of 51 million people, the country has experienced robust economic growth in recent decades, driven by a burgeoning export market – predominantly in the industrials, automotive and consumer electronics industries. After an initial post-COVID recovery, the South Korean economy has slowed, and may face further headwinds as global growth comes under pressure from the effects of tighter monetary policies.

South Korean companies have long traded at a steep valuation discount to both emerging and developed market indices. Many global investors have been put off by the market’s opaque corporate practices, investor unfriendly regulations and onerous tax policies, in addition to the lingering North Korean risk. Many of the corporate governance practices which have held the market back are influenced by the interests of South Korea’s dominant family-owned conglomerates, or chaebols, which include Samsung, Hyundai, LG and Lotte. These chaebols control 62% of companies in the MSCI South Korea index, and a significant number of the chaebol-related companies fall into that P/B < 1 category. When MSCI’s ESG research compares South Korean companies to their global peers, South Korea comes in at a disappointing 26th percentile on the governance pillar, with a particularly low sub-pillar score on board-related issues (Display).

South Korean ESG Governance Scores

Percentile Relative to Global Peers

Current analysis and forecasts do not guarantee future results.
As of April 13, 2024
Source: J.P. Morgan and MSCI

Recently, however, Government initiatives in South Korea have kick-started the road to reform. Inspired by Japan, South Korea has introduced its own “Corporate Value Up program” - an injection of measures designed to bring about improved capital management by listed South Korean companies, seeking to embed constructive guidelines that empower minority shareholders.

The program began with a raft of capital market advancement initiatives introduced at the start of President Yoon’s term in 2022 and was recently augmented with new guidelines aimed at further enhancing shareholder disclosure, increasing shareholder returns through dividends, encouraging share buybacks and improving operating performance, all with a view to boosting valuations.

On the back of the announcements earlier this year, prices for low P/B stocks rose steadily, in anticipation of real change. April’s general election results, which handed greater parliamentary control to the opposition DP party, dampened investor interest and led to some pullback of stocks previously seen as “value up” beneficiaries.

The “value up” program does of course face challenges, for example that it is currently set up on a voluntary basis with no legal obligation for compliance, and the South Korean market has punitive inheritance tax laws which are unlikely to change given the current division of power in South Korean politics.

However, with the number of South Korean retail investors having increased from six million in 2019 to 14 million today, 40% of voters are now shareholders. This rise in public interest creates a more bipartisan platform for change. It’s in everyone’s interest for the share market to perform well. And in our recent interactions with South Korean companies, including the management of a number of the large chaebol members, we are hearing that the reforms are indeed being taken seriously, with many companies not wanting to be seen to be dragging their feet while their competitors push ahead. There has also been a noticeable rise in shareholder dissention, opinion letters to Boards and proposals at AGMs – signaling a rise of activism which was also a feature of the successful governance improvement seen in Japan.

We recognize that these reforms will take time to realize, and that for the P/B of South Korean companies to see lasting improvement, a concerted and combined joint effort across Government, regulators, agencies and the investment community will be needed. However, we believe that the early signs remain promising.

Because much of the governance improvement is targeted at lower-valued companies, the impact is likely to be more of a tailwind for value-oriented investment strategies. In Japan, MSCI’s value index has outperformed its growth counterpart by 76% since the end of 2020. In South Korea, although we are at a much earlier stage of the governance improvement program, MSCI’s value index has outperformed the growth index by 39%, and we believe there is significantly more potential still to be realized (Display).

Value vs. Growth Performance in Japan and South Korea

MSCI Total Return Style Indices (January 1, 2021=100)

Current analysis and forecasts do not guarantee future results.
As of March 31, 2024
Source: Bloomberg, MSCI and AB

This move towards improving corporate governance is also starting to spread more widely across emerging markets.

In China, State-Owned Enterprises (SOEs) have historically been valued at a sizeable discount to their private and other EM peers. In 2022, the China Securities Regulatory Commission introduced a long-term focus on re-rating these SOEs, in an attempt have them shoulder more of the burden of China’s economic challenges and to bolster growth. This effort has been reinforced in March this year with regulations announced by the China Securities Regulatory Commission, encouraging companies to make cash dividends and buy back shares; and then further in April by the State Council’s release of the “Nine Point Guideline”, which is aimed at improving the quality of equity listings and encouraging more long-term capital into the market.

And India is getting in on the act too. For example, in Prime Minister Modi’s home state of Gujarat, the Government has mandated a minimum dividend level declared for shareholders of 30% of profit after tax, or 5% of net worth, whichever is higher. Certain share buyback, bonus share and share splitting schemes have also been mandated as part of the overall policy.

While there remain implementation risks, we remain positive on this shift seen in South Korea and other emerging markets towards improving governance. As an active, value-orientated and contrarian investor, we believe that we are well placed to identify companies who are willing to embrace these governance changes and as a result deliver attractive shareholder returns.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

Stuart Rae

Stuart Rae is Chief Investment Officer of Emerging Markets Value Equities since 2023 and Chief Investment Officer of Asia-Pacific Value Equities, a position he has held since 2006. He is also a long-standing Portfolio Manager for China Equities. Previously, Rae was CIO of Australian Value Equities from 2003 to 2006. He joined the firm in 1999 as a research analyst covering the consumer sector, initially working in New York and London before moving to Sydney in 2003, Hong Kong in 2006 and Melbourne in 2021. Before that, Rae was a management consultant with McKinsey for six years in Australia and the UK. He holds a BSc (Hons) in physics from Monash University, Australia, and a DPhil in physics from the University of Oxford, where he studied as a Rhodes Scholar. Location: Melbourne

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