Since the beginning of the year, the Korean stock market has seen abnormal excitement over the Korean government's plans for revitalizing the capital market. In particular, stock market investors are excited by the "Value-up" program, which aims to highlight and fire up interest in Korean companies that are underappreciated by investors. The plan is to improve the stock price performance of companies suffering from low valuations via improved profitability, capital management and overall transparency. We have seen a similar program met with huge success over the past 12 months in Japan, whose main bourse, the Tokyo Stock Exchange (TSE), has been attracting strong attention from global iinvestors. The TSE's main index, Nikkei 225, has just reached a new highest level since its heyday of the 1990s.
Last month, the Korean government provided some general guidelines for the program, which has already put the main index, the KOSPI, on a solid rally since the initial announcement in January. There was some disappointment about the announcement, namely lack of details on implementation. Seeing the frustration, the head of the Financial Supervisory Commission (FSC) came out a couple of days later to pledge his commitment to force the delisting of companies in serious breach of the guidance. Nonetheless, the global investor community continues to show keen interest in the future development of the issue as Japan has demonstrated the power of global fund flow seeking a destination that China has dominated for the past 20 years. With China increasingly under global scrutiny for its political interference, investors urgently need an alternative to China.
Based on the announcement, much of the implementation has put the onus on the companies, which may disappoint some investors looking for more aggressive measures. However, it is helpful to remind investors that the Japanese version took many years before being recognized and also leaves the implementation to individual companies for the most part.
Over the next few months, much debate will center not only on details but also on prioritizing the issues (politically and economically), striking the delicate balance between enhancing capital markets and the political sentiment of the working-class population about to vote in a few weeks. However, the urgency to inject life into financial markets is not just an election cycle issue. In Japan, a new form of growth called "asset-based income" has emerged, where growth via investments and financial assets replaces economic growth via job growth and exports. Similarly, the Korean public is increasingly dominated by the MZ generation seeking sustainable and stable returns on financial assets. Their previous generation enjoyed decades of robust job and income growth turbo-charged by a booming export sector and a bull market in residential property, which was the asset class to own. But with the demographic cliff steepening and export industries fading, revitalizing the financial market is one remaining available growth channel. Thus, understanding the need to support sagging growth is an urgency driving the two opposing parties, regardless of the election results in April.
The two most important parts of the latest guideline are the "protection of minority shareholders" and "tax reform" to enhance investments. A constructive policy on the two issues will be critical in persuading investors of the structural reform of Korea's capital market. In particular, the most critical part of the reform will be constructive taxation on dividends, which is the missing transmission mechanism for minority shareholders to share their companies' income stream. There have been quiet talks of taxation change to incentivize dividend culture and also change the perception of dividends as an income for the ultra-rich.
For decades, the lack of dividend culture has been blamed for the excessive valuation discount dubbed the "Korea discount." Over the years, many discount factors have been proposed, including cyclicality of earnings, structurally weak financial system, excessive regulations, and even North Korean risk. However, my research points to weak corporate governance and lack of dividends as the most compelling factors. A welcoming dividend culture needs to be the link to efficient value transfer to minority shareholders. Many investors blame the dividend issue on Korean companies and their need to better understand the concept of capital management.
However, for many years, I have made the critical point that dividend culture is frowned upon by the Korean government as dividends are considered a financial means only afforded to the super-wealthy. This perception is reflected in the taxation treatment where individuals (including chaebol family members) with dividend income of more than 20 million won per year are hit with the highest tax rate of 49 percent. As a result, as many of the key operating companies grow and generate profits, the income flow to its shareholders or parent company via dividends is impeded by the punitive taxation imposed on the majority shareholders.
In essence, imposing the highest tax rate on dividends symbolizes Koreans' (government and public) view that dividends are for the ultra-rich income class. Paradoxically, the capital gains tax on stock trading is zero, implying stock trading gains are for the working class. For Korea's rapidly aging population, the divisive mindset on dividends and the tax treatment on stocks and dividends are long due for an overhaul. The dividend taxation issue will take time, as tax legislation reform could take years. However, the gradual appreciation for dividends has continued, and landmark decisions by Samsung Electronics and Hyundai Motor to raise dividends remain a symbolically important legacy of the government's nod to dividends.
The latest guideline is meaningful as it is the first time the Korean government has specified criteria for listed companies they consider "good versus bad." For decades, the Korean government has not definitively defined what constitutes a good company. The closest to a unified agreement on good companies were those that grow, especially via overseas expansion as they serve the national interests via employment and investments. By defining the granular traits of companies the nation endorses, we at least have a playbook for policies to support in the coming years.
Peter S. Kim is a managing director of KB Financial Group.
Korea’s 'Value-up' program dissected
26
0
11.03.2024
Since the beginning of the year, the Korean stock market has seen abnormal excitement over the Korean government's plans for revitalizing the capital market. In particular, stock market investors are excited by the "Value-up" program, which aims to highlight and fire up interest in Korean companies that are underappreciated by investors. The plan is to improve the stock price performance of companies suffering from low valuations via improved profitability, capital management and overall transparency. We have seen a similar program met with huge success over the past 12 months in Japan, whose main bourse, the Tokyo Stock Exchange (TSE), has been attracting strong attention from global iinvestors. The TSE's main index, Nikkei 225, has just reached a new highest level since its heyday of the 1990s.
Last month, the Korean government provided some general guidelines for the program, which has already put the main index, the KOSPI, on a solid rally since the initial announcement in January. There was some disappointment about the announcement, namely lack of details on implementation. Seeing the frustration, the head of the Financial Supervisory Commission (FSC) came out a couple of days later to pledge his commitment to force the delisting of companies in serious breach of the guidance. Nonetheless, the global investor community continues to show keen interest in the future development of the issue as Japan has demonstrated the power of global fund flow seeking a destination that China has dominated for the past 20 years. With China increasingly under global scrutiny for its political interference, investors........
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