South Korea Is At The Forefront of AI, EVs, and Biotech — But Its Stock Market Valuation Lags the Rest of the Industrial World – The Average Joe

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    South Korea Is At The Forefront of AI, EVs, and Biotech — But Its Stock Market Valuation Lags the Rest of the Industrial World

    Noah Weidner

    March 21, 2024

    When South Korea isn’t dealing with troublesome neighbors, low birth rates, and high cost of living, it’s figuring out ways to turn its underperforming stock market around.

    Despite being home to valuable companies on the cutting edge of artificial intelligence (AI), electric vehicles (EVs), and biotech, the world’s 13th largest economy doesn’t get the same investor appreciation as other industrialized countries like Taiwan or Japan.

    It’s called the Korea Discount… and in this case, the discount isn’t a good thing. It refers to the way that South Korean firms (i.e., Samsung, SK Inc., and LG) trade at significantly lower valuations compared to global competitors. The discount hinders economic growth, makes it tough for companies to raise capital, and makes the country’s stock market unattractive to investors. But the discount has surprisingly historical roots.

    • Many South Korean conglomerates are controlled by family “wealth cliques” known as chaebols, which exert extreme influence over companies’ boards and management — controlling hundreds of companies and boasting deep government connections.
    • Critics argue that chaebols deliberately keep Korean share prices “artificially low” at the expense of minority shareholders to avoid Korea’s sky-high inheritance taxes, with few measures in place to stop them.

    Closing the gap

    South Korea aims to tackle these issues by reducing inheritance taxes and implementing market reforms to protect minority shareholders and encourage companies to prioritize returns and governance. Investors are skeptical, but even a small improvement could yield billions in new market value.

    • Eliminating the gap could significantly increase company values, as many South Korean companies currently trade below their book value.
    • For instance, if the Korea Discount were eliminated, Samsung Electronics’ valuation (South Korea’s most valuable company) would double if it matched the book value of its US competitor Micron ($MU).

    Will it work? It did for Japan, whose stock market struggled for decades until the government initiated corporate reforms in 2013. It took almost 10 years, but Japan’s economy is now on fire — rising nearly 50% in the past year, surpassing the S&P 500. South Korea seems to be following a similar path, with Goldman Sachs predicting one of the highest earnings growth rates globally this year — projecting a 54% increase in 2024 and 20% the following year.

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