Franklin Templeton released a report last month titled “Addressing the Korea Discount.” (Image courtesy of Franklin Templeton)
SEOUL, Jul. 10 (Korea Bizwire) – Global asset management firm Franklin Templeton has offered a cautiously optimistic assessment of the South Korean government’s efforts to address the so-called ‘Korea Discount’ – the persistent undervaluation of Korean stocks.
While viewing the corporate value enhancement policies positively, the firm anticipates that tangible results may take time to materialize.
According to financial industry sources on July 9, Franklin Templeton released a report last month titled “Addressing the Korea Discount,” which detailed these observations.
Franklin Templeton, a U.S.-based asset management company with over 75 years of investment experience, boasted total assets under management (AUM) of $1.6 trillion as of the end of March.
The report highlights a paradox in Korean markets: “Despite housing some of the most dynamic and innovative global companies in the semiconductor and materials industries, Korean firms trade at the lowest average valuations among emerging market companies.”
This undervaluation is stark when comparing valuation metrics. Over the past decade, the average price-to-earnings ratio (PER) for the MSCI Korea Index stood at 12.8, with a price-to-book ratio (PBR) of 1.1.
In contrast, the MSCI Emerging Markets Index showed higher figures, with a PER of 13.9 and a PBR of 1.6. These numbers underscore that the Korean market has the lowest valuations among major emerging markets.
Franklin Templeton attributes this undervaluation to Korea’s unique corporate governance weaknesses and a perceived indifference to minority shareholder rights.
The report notes, “The chaebol structure, characterized by circular shareholdings and family control without commensurate economic stakes, also weighs on valuations.”
It explains that investors are compelled to apply a discount to companies’ fair values due to management uncertainties stemming from owner-dependent executives.
Another factor contributing to the Korea Discount is the low return on equity (ROE). The MSCI Korea Index’s ROE of 8.9% lags behind the MSCI Emerging Markets Index’s 11.8%, which the report suggests translates into lower profitability for Korean companies.
The asset manager also pointed out the evolving role of institutional investors in Korea. It cited a 2022 incident where the National Pension Service (NPS) opposed the reappointment of LG Chem’s vice chairman at a shareholder meeting, citing concerns over shareholder rights infringement following LG Energy Solution’s spin-off.
However, Franklin Templeton observed that such activist roles by the NPS have been diminishing.
“Korea’s president has constrained institutional investors’ activist investments,” the report states, adding that “the NPS is now being asked to focus its stewardship activities on companies with dispersed ownership, such as POSCO and KT.”
The report also touches on Korea’s tax policies, mentioning low tax support for dividends, high inheritance taxes, and corporate tax issues. It predicts that “with the Democratic Party controlling the parliament, the possibility of significant tax reform is small.”
Regarding proposed amendments to the Commercial Act to expand directors’ fiduciary duties, Franklin Templeton sees low chances of parliamentary passage.
Nevertheless, it emphasizes that “support for these changes from the Deputy Prime Minister for Economic Affairs and the head of the Financial Supervisory Service is significant.”
Franklin Templeton added that while it views Korea’s value-up policies as “a step in the right direction,” it cautions that “due to the voluntary nature of the policies and political opposition to tax reforms, it will take time to see concrete results.”
M. H. Lee (mhlee@koreabizwire.com)
