J.P. Morgan, a leading US investment bank, has thrown its weight behind South Korea’s landmark commercial act revision, saying that the new government’s series of reform measures could mark a turning point for the undervalued Korean stock market in much the same way Japan’s shareholder-focused overhaul reinvigorated Tokyo equities over the past decade.
“The Commercial Act amendment by the new government is expected to drive substantial progress in the reevaluation of Korea equities,” Sjoerd Leenart, who leads the Asia Pacific region at the global financial services firm, said in a recent interview with The Korea Economic Daily.
“While geopolitical risks and the global growth rate are beyond the control of the Korean government, they can contribute through regulation that drives better shareholder focus, balance sheet improvement and stronger shareholder returns,” he said.
His comments came as the National Assembly on Thursday passed a bill that calls for expanding corporate directors’ fiduciary duty to shareholders to better protect the rights of minority shareholders.
The law revision is one of the key campaign pledges of liberal President Lee Jae-myung, who took office early last month.
Drawing parallels to Tokyo’s experience, Leenart, the J.P. Morgan Asia Pacific CEO, said foreign investors have observed the Japanese equity market emerge from the “lost 30 years” after undergoing over a decade of corporate governance restructuring since the Abe administration.
“With the new (Korean) government’s initiatives, the Korean equity market may follow a similar trajectory,” he said.
NEED FOR CORPORATE GOVERNANCE IMPROVEMENT
Regarding the still low valuation of Korean equities, Leenart identified perceived weaknesses in corporate treatment of minority shareholders, relatively low shareholder return levels, and geopolitical risks as the key factors.
The Korean equity market is sensitive to the global economy due to its export-driven economic structure and is vulnerable to uncontrollable external headwinds because of its geographical position on the Korean Peninsula.
However, he said he sees significant potential for enhancing shareholder value and corporate governance through government efforts.
“Stronger care of minority shareholders, stronger balance sheet management, and stronger shareholder returns are factors likely to make Korean equities more attractive to both foreign and domestic investors,” the CEO said.
Despite Korea “being a country with many inherent strengths,” Korean stocks’ valuations are relatively low, he said.
He said the price-to-earnings ratio (PER) of the Korean equity market stands at 10 times, which is well below that of the US, which stands at 22.5 times, the global average of 20 times and the Asia average of 15 times.
“This makes Korean valuation attractive,” said Leenart.
Last month, global index provider MSCI Inc. declined to add Korea, Asia’s fourth-largest economy, to its watchlist for potential inclusion in the developed markets category, citing the country’s opaque stock-related rules and foreign ownership limits as the Korea discount.
POSITIVE OUTLOOK
JP Morgan’s endorsement of the reform momentum reflects a growing view among foreign investors that Korean equities may be entering a phase of structural revaluation – provided the political determination to push through the agenda remains intact, analysts said.
The positive outlook of foreign investors for the Korean market is reflected in the recent two-month trend of global capital inflows.
Last month, the main bourse’s benchmark Kospi index reclaimed the 3,000-mark for the first time in three and a half years.
Following the passage of the Commercial Act revision, the Kospi rose 1.34% to close at 3,116.27 on Thursday – the highest since Sept. 27, 2021.
“Foreign investors started buying from May in anticipation of the (presidential) election results. They are seeing a lot of opportunities in the Korean market,” said the J.P. Morgan executive.
While expressing his hopes that Korea will follow a similar trajectory to Japan, the CEO cautioned that such reforms are neither simple nor quick.
“Corporate governance and balance sheet improvements, as well as profitability enhancements, are important, but they don’t happen in a year. Instead, they require a multi-year effort. In this regard, the process is now starting in Korea, and over the next five to ten years, I anticipate a steady inflow of foreign investment,” he said.
J.P. MORGAN’S OPTIMISM FOR ASIA PACIFIC
“We are paying close attention to India and Japan, which are undergoing significant changes,” said Leenart.
He highlighted the substantial economic activity in both countries and, particularly for Japan, remarked: “We are finally seeing the results of Abenomics playing out. There is active restructuring of the corporate sector.”
He also discussed the role of private equity firms (PEFs) in Korea’s restructuring process.
Since the adoption of the PE system in 2004 to counter foreign capital, multiple global PEFs have been operating in Korea, with the overall market size growing.
“Corporates are hoping to streamline their businesses by divesting non-core businesses, and PEFs can acquire and manage these businesses more effectively. PEFs in Korea can aid in the restructuring of the corporate sector,” he said.
J.P. Morgan has been expanding its mid-cap client base in the Asia Pacific region.
“Companies now can offer products and services on a global scale. Whether they are expanding to the US or Europe, J.P. Morgan is fully equipped to deliver comprehensive cross-border financial services,” he said.
By Eun-Kyung Song and Jun-Ho Cha
norae@hankyung.com
In-Soo Nam edited this article.
