Global money chases hot S. Korean stock market

The Star

5 days ago

SOUTH KOREAN stocks, already this year's best performers among the world's major markets, are becoming a magnet for foreign investors as bold regulatory reforms to lift valuations and empower minority shareholders gain traction.
Just this month, policymakers voted in favour of pivotal law changes to make board members legally accountable to all shareholders.
They are now focusing on the next wave of reforms – including improvements to the voting system for selection of board members, and reducing treasury stock holdings – all with the goal of reining in the nation's many family-run conglomerates, or chaebols.
From Wall Street to London, investors are taking notice.
Overseas funds, which dumped South Korean stocks for nine straight months through April, are piling back into the market. Strategists at global banks including Goldman Sachs Group Inc, JPMorgan Chase & Co, Citigroup Inc and Morgan Stanley are among those who have upgraded South Korea since the start of June.
The benchmark Kospi has surged 33% in 2025, helping propel the equity market's value above US$2 trillion for the first time in three years.
Culture shift
Reforms 'will contribute to the continuation of a culture shift already underway and will reduce the ability of controlling shareholders to compel restructurings that benefit them at the expense of minority shareholders,' said Jonathan Pines of Federated Hermes, whose US$4.5bil Asia Ex-Japan equity fund has beaten 92% of its peers over one year.
'We remain very significantly 'overweight' on South Korean stocks.'
South Korean authorities have been seeking to replicate the success seen in Japan, where a push for corporate reforms helped boost valuations and spur a world-beating equity rally.
Optimism that the nation is serious about tackling the so-called 'South Korea discount' has grown since newly elected President Lee Jae Myung made raising governance standards and improving stock-market returns one of his top priorities.
Net inflows from foreign funds have crossed US$3bil in July alone.
That's more than their combined purchases in the previous two months.
'We're seeing a big change in the corporate governance,' said Joshua Crabb, head of Asia Pacific equities at Robeco Hong Kong Ltd, noting more capital discipline, buybacks and dividends.
'This does not require a great global environment.
'These are things that are almost like a bit of self-help.'
After having discussed the latest round of commercial code revisions earlier this month, lawmakers plan on voting for them on Aug 4.
During this round, they will be pushing to mandate a cumulative voting system for listed firms in an effort to promote board diversity.
Cumulative voting has become a cornerstone of the ruling Democratic Party's corporate governance agenda.
In such a system, a shareholder typically receives votes equal to the number of shares they hold multiplied by the number of board seats up for election.
This would enable minority shareholders to pool votes and elect at least one board member aligned with their interest – such as advocating for more share buybacks or dividends.
Another proposal that will be considered for this round would be to cap the number of audit committee members that major shareholders can nominate.
Treasury stock
Then there is the issue of treasury shares, which have become a flashpoint in South Korea.
Such stock can be transferred by companies to friendly parties, such as family members or affiliates – who then can vote with them to give the controlling family more power without increasing actual ownership.
While not directly part of the agenda for this round of corporate code revisions, a proposal to mandate the cancellation of treasury stock remains a key focus for Lee and his allies as they pursue their ambitious goal of 'Kospi 5000.'
The proposal has drawn strong opposition from conglomerates.
It should be phased in 'to avoid instability,' Lee Han-joo, a senior aide to Lee and the head of the State Affairs Planning Committee, told Bloomberg in a recent interview.
At a minimum, companies may push to preserve existing treasury shares while agreeing to cancel those acquired going forward, said Seokkeun Ha, chief investment officer at Eugene Asset Management.
'That would disappoint the market,' he said.
Authorities are discussing various options in this regard, according to a person familiar with the matter.
Options range from creating a model similar to that of Germany's to using a more stringent approach that requires all existing treasury shares to be retired within six months, the person said, asking not to be identified as negotiations are ongoing.
The German model requires companies to sell treasury shares that exceed 10% of the capital stock within three years of purchase, according to information on a government website.
'If we're aiming for Kospi 5,000, I believe treasury share cancellation is essential,' Ha said.
'That's how return-on-equity increases and higher return of equity drives up the price-to-book ratio.'
Lee's crusade to protect minority shareholders' rights relies on lawmakers delivering substantive changes at a credible pace while resisting pushback from entrenched interests.
With markets having rallied so hard on expectations, the bar for disappointment is low.
In a recent survey of 300 listed companies released by the South Korea Chamber of Commerce and Industry, about 77% said further commercial code revisions could have 'negative impact on business growth.'
'Big bang gains were quite a bit driven by sentiment, and that's gone,' said Xin-Yao Ng, investment director at Aberdeen Investments.
'Going forward, we'll need better delivery of legislation to incentivise value-up and companies themselves delivering actual changes.' — Bloomberg
Sangmi Cha and John Cheng write for Bloomberg. The views expressed here are the writers' own.