Those who follow the APAC region will be aware of Japan's thriving stock market, exceeding the previous all-time high after a 34-year wait. Bizarrely, while interest rates are still in negative territory and economic concerns prevail, we are seeing stock-market valuations last seen before many of the batch of current traders were even born. We also know that only a fraction of Japanese household cash reserves are invested in the market, leaving potentially huge upside even from these record highs.

 

Can South Korea replicate this success?

 

In a classic case of "it's better to travel than arrive", there was a rally on the South Korean market ahead of the government announcement. Unfortunately, the announcement itself was short in detail although reasonably strong in direction. In simple terms, the South Korean authorities are looking to force companies to boost shareholder returns, pushing the stock market higher and boosting consumer confidence and the economy. It sounds easy when you put it down on paper!

 

Korean Value-Up index

 

The authorities are also moving ahead with a "name and shame" system similar to that used in Japan. Conversely, those companies taking a more proactive approach to improve capital efficiency will get special mention and "tax incentives", which have yet to be confirmed.

 

We know from official data that 20% of Japanese companies joined the government's programme to boost shareholder returns. The Korean authorities plan to go further than their Japanese counterparts and expect a significantly higher uptake.

 

Current valuations

 

You will not be surprised to learn that circa 60% of companies listed on the South Korean Kospi Index trade at less than their price-to-book ratio. In layman's terms, this means that the companies are valued at less than their book value, which in many cases will also be underestimated. While it is helpful to encourage companies to enhance shareholder returns, there is a delicate balance between false markets and genuine encouragement. Will the South Korean authorities find that elusive balance?

 

Slow start, just like Japan

 

As we mentioned above, markets ran ahead before the government announcement, then fell back on the initial disappointment. These market movements are very similar to those experienced in Japan, where the shareholder efficiency programme also started very slowly.

 

It is also important to note that South Korea is dominated by a relatively small number of giant conglomerates. Unpicking complex cross-shareholdings, encouraging enhanced returns to shareholders, and a more ambitious approach to the future will be challenging. These companies already dictate markets; therefore, why would they need to take on any more risk?

 

Conclusion

 

A good start, but more work needed is the initial response to South Korean government attempts to enhance shareholder returns. As one adviser commented, it took ten years for the Japanese measures to take effect, and South Korea is only at the start of this journey.

 

The moves are encouraging and certainly attracting international interest, but without any detail, it's difficult to say how long it may take to impact shareholder returns. It might be a start if the authorities could unpick the complex cross-shareholdings in some of South Korea's largest conglomerates, but that is a very different type of challenge.

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