Soaring by 33%! South Korean stock market is the strongest in the world this year, foreign capital is buying

Source: Wall Street News

A large amount of foreign capital has poured into the South Korean stock market. The Korea Composite Stock Price Index (KOSPI) has risen by more than 3% cumulatively this year, and the total market value of South Korean stocks has returned to the $2 trillion mark for the first time in three years, making it one of the strongest stock markets in the world.

In July alone, the net inflow of foreign capital into the South Korean stock market exceeded $3 billion, far surpassing the total of the previous two months.

The core driving force behind this is the drastic corporate governance reforms promoted by the South Korean government.

Foreign capital is strongly returning. Is South Korea replicating Japan's experience?

The South Korean government's reform goals are very clear: to weaken the excessive control of listed companies by chaebol families, improve corporate valuations, strengthen the rights of minority shareholders, and attract the return of global investors.

This month, South Korea passed a key legal amendment requiring board members to be legally responsible to all shareholders, rather than serving only the interests of controlling major shareholders.

Next, the focus of the reform will shift to key issues such as optimizing the director election mechanism and reducing the proportion of treasury stocks (shares repurchased by the company but not cancelled).

South Korea's legislative body plans to vote on relevant clauses on August 4. Key measures include introducing the "cumulative voting system" and restricting the power of major shareholders to manipulate the audit committee.

Among them, the introduction of the "cumulative voting system" is quite groundbreaking. When participating in director elections, shareholders can concentrate their voting rights on specific candidates. This means that minority shareholders can pool their strength to ensure that directors who truly represent their demands are elected, changing the previous situation dominated by major shareholders.

At the same time, the reform also strives to limit the number of audit committee members that major shareholders can nominate, avoiding the loophole of "self-supervision" by the controlling party from the mechanism, so that internal supervision can truly play a checks and balances role.

In addition, the move to cancel treasury stocks also hits the nail on the head. Although the current revision of the Commercial Law does not formally include the mandatory cancellation of treasury stocks, President Lee Jae-myung and his advisory team have listed it as the focus of the next stage of reform. This measure aims to crack down on the practice of major shareholders transferring treasury stocks to "friendly parties" to manipulate company decisions without increasing their shareholding ratio.

These measures are considered a round of institutional reforms with great sincerity by South Korea towards minority shareholders. From Wall Street to London, international investors are paying attention to this change. Many investors believe that the South Korean authorities are trying to replicate Japan's experience.

Overseas funds had reduced their holdings of South Korean stocks for nine consecutive months (as of April this year), but now they are pouring back. In July alone, the net inflow of foreign capital into the South Korean stock market exceeded $3 billion, far exceeding the sum of the previous two months. Strategists from several global investment banks, including Goldman Sachs, JPMorgan Chase, Citigroup, and Bank of America Merrill Lynch, have upgraded their ratings on the South Korean stock market since the beginning of June.

Since the newly elected President Lee Jae-myung put forward the ambitious goal of "KOSPI 5000 points", confidence in the South Korean government's serious solution to the so-called "Korea discount" problem has been continuously enhanced.

Chaebols strongly oppose, and the market expects the government to show stronger execution

Although the reform direction is clear, it has encountered strong opposition from large enterprises. A survey by the Korea Chamber of Commerce and Industry shows that 77% of listed companies are worried that the revision of the Commercial Law will affect business development. Lee Han-joo, a senior adviser to Lee Jae-myung and chairman of the National Affairs Planning Committee, said recently that the policy should be implemented in phases to avoid market turmoil.

Seokkeun Ha, chief investment officer of Eugene Asset Management, pointed out that if our goal is really KOSPI 5000 points, then the mandatory cancellation of treasury stocks will be the key to improving corporate ROE and valuation. If the reform is limited to the requirement of canceling "newly added treasury stocks in the future" while leaving existing stocks untouched, it may disappoint the market.

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