Weekly Buzz: 📝 South Korea’s taking notes from Japan

26 April 2024

Japan’s stock market has been on a hot streak after a series of corporate governance reforms. It’s pushed companies to buy back shares, cut down on complicated cross-holdings, and beef up dividend payouts. Now South Korea’s looking to take a page from Japan’s playbook.

What’s going on here?

Investors seem to value South Korean companies less than their peers. It’s a phenomenon prevalent enough that pundits have coined a term for it: the ‘Korea discount’. This lack of investor enthusiasm for South Korean stocks is often linked to the influence of the hulking, opaque conglomerates known as chaebols.

Low shareholder returns are another big reason behind the ‘Korea discount’. South Korean companies have historically been pretty tight-fisted with dividends, paying out the least in the region, Japan excluded.

It’s why the country’s now rolling out its Corporate Value-up Program, a series of initiatives which includes pushing its companies to share more of their wealth with stock investors. Similar reforms in Japan have worked to boost confidence in its market.

While previous attempts to elevate South Korea’s stock valuations weren’t a smash hit, this time might be different. Japan’s recent success serves as a powerful example, with a notable shift toward greater capital efficiency for Japanese companies. And South Korea’s seeing a wave of new retail investors, nearly triple the amount since five years ago. This renewed interest in its stock market may work to support the country’s new value-boosting initiatives.

What’s the takeaway here?

Even without corporate reforms, South Korea might still be worth a look. The country’s firms are poised to benefit from global trends, including rising geopolitical tensions and a surging demand for tech. If you’re looking to invest in the country, our Flexible portfolios might be a good choice: simply create a portfolio from scratch and select ‘South Korea’ under ‘Global Equities’.

💡 Investors’ Corner: The dollar milkshake theory

The US dollar’s been strengthening all year – and it’s making for awkward conversations among trading partners. If the US dollar is strengthening, that means other currencies are weakening. And a severe slump can stress closely-linked economies like Japan and South Korea – so it’s no wonder their finance ministers are raising their voices.

The dollar milkshake theory explains what happens when there just aren’t enough US dollars to meet rising demand. As the currency strengthens, countries that carry USD-denominated debt see their repayment costs rise, increasing the risk they’ll miss a payment.

These potential defaults, in turn, boost the dollar’s demand even more, because of its status as a safe haven in times of uncertainty. In worst-case scenarios, the milkshake froths up a global debt crisis, sending other currencies sliding and icing over a lot of portfolios.

While the theory is a little alarming, it does teach us some of the mechanics running global economics. The US dollar effectively holds the world’s financial system together. As the world’s primary reserve currency, it’s the financial buffer countries use to handle shocks. And because major commodities like oil are priced in dollars, changes in the currency’s value have far-reaching effects, influencing costs worldwide.

These articles were written in collaboration with Finimize.

🎓Simply Finance: Book value ratio

The book value ratio, often referred to as the price-to-book ratio (P/B), is the bargain hunter’s tool. It's calculated by dividing the market price of a company's stock by its book value, which is the net worth of the company if you were to liquidate all its assets and pay off all its debts.

The P/B ratio offers insight into whether a stock is trading at a premium or discount – the lower the ratio, the better the deal you're potentially getting. Keep in mind however, a low book value ratio might also signal that there may be reasons why a company isn’t favoured by the market.

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