South Korea turmoil after Yoon’s martial law fiasco bodes ill for its stock market

South Korean markets have had a dismal 2024, with the so-called “Korea discount” in its stock markets widening compared to other global peers. The recent political upheaval is expected to entrench this phenomenon.

The country’s benchmark stock index, Kospi, has lost over 7% this year and the underperformance of the South Korean market signals its “Corporate Value-Up” program, announced in February this year, has failed to address the “Korea discount.”

The “Korea discount” refers to South Korean securities trading at lower valuations relative to regional peers due to investors’ concerns over issues such as corporate governance at large family-owned conglomerates that have an outsized influence over the country’s economy.

The political turmoil in the country has further worsened investors’ sentiment, with the Kospi underperforming the MSCI Asia ex-Japan index by 2.3 percentage points since Dec. 3 when President Yoon Suk Yeol imposed and then revoked martial law within hours.

The attempt at martial law has sent the risk premium for Korean assets higher, thereby dealing a setback to the “Value-Up Program,” Vishnu Varathan, managing director and head of macro research for Asia ex-Japan at Mizuho Securities said in a Dec. 10 note.

South Korea under Yoon had strived to boost the country’s stock markets and combat the “Korea discount” via a Japan-style program that sought to improve corporate governance and increase investor engagement, among other things.

According to data from the Korea Exchange, the Kospi has a price-to-book ratio of 0.86, while its price-to-earnings ratio stands at 13.65 as of Dec. 12. Both the metrics, which indicate how much the investors value the index, have declined from a year earlier.

For comparison, Japan’s Nikkei 225 stock benchmark has a price-to-book ratio of 1.44 while its price-to-earnings ratio stands at 15.90 as of Dec. 11.

While Japan stocks surged as it implemented measures to lift its markets, South Korea has been struggling. For instance the “Korea-Value Up Index,” launched in September, which consists of 100 listed “best practice” companies that comply with the “Value-Up” program, has price-to-book ratio of 0.99 and a price-to-earnings ratio of just 10.29.

“The distractions of ousting Yoon amid fragile government and fragmented politics is likely to dilute and delay policy efforts to boost equity valuations,” Varathan said, adding that power balance in South Korea could shift in favor of large and influential conglomerates, which could entrench the “Korea discount” even more.

South Korea has several large family-owned global conglomerates, known as “chaebols,” usually controlled by the founder’s family. These may consist of a group of companies or several groups of companies.

Notable chaebols include market heavyweights such as Samsung Electronics, LG, SK and Hyundai. While they are a huge contributor to the country’s GDP, the complex shareholding structure of chaebols mean that investors hold little sway over the company’s strategic direction.

The four conglomerates mentioned above make up about 40% of South Korea’s GDP, according to South Korean media.

Market reforms could receive a setback due to the political turmoil, said Lorraine Tan, director of equity research for Asia at Morningstar, while adding that the reforms will not be “derailed.”

“I think the longer the leadership change takes, the more likely investors will be sidelined. President Yoon is unpopular and a peaceful transition away from his leadership would help,” she pointed out.

The embattled Yoon has survived an impeachment vote over the weekend after members of his ruling People’s Power Party walked out of the country’s parliament, but opposition parties have vowed to continue efforts to impeach him.

Jeff Ng, Head of Asia Macro Strategy at Sumitomo Mitsui Banking Corporation said that the “Korea discount” is still likely to persist into 2025 due to weak economic conditions, slower exports, and a weak Korean won.

“Investor confidence may return in the medium-term, but a swift resolution of the domestic uncertainty looks unlikely at this stage.”