Goldman Sachs Believes that Korean Government’s Policies, Shareholder Activism Contribute to Decreasing Korean Discount

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A Goldman Sachs report evaluated that the Yoon Suk-yeol government’s reorganization of capital market policies to expand shareholder rights and interests and strong winds of shareholder activism in the Korean stock market are positive in resolving the Korea discount which undervalues the Korean stock market.

“The Korean stock market is subject to the Korea discount due to low dividends and low shareholder returns,” wrote Goldman Sachs, a global investment bank (IB), in a report on the status of the Korean stock market on March 9. “A study by the Korea Capital Market Institute (KCMI) shows that the fact that total shareholder returns are small accounts for 37 percent of factors for the Korean discount.”

First of all, Goldman Sachs evaluated that an improvement in the shareholder rights protection system actively promoted by the Yoon Suk-yeol administration was positive for resolving the Korean discount.

“As the number of individual shareholders soared after the outbreak of COVID-19, interest in shareholder rights and interests surged, which became the main background of a rapid increase in shareholder proposals,” the U.S.-based investment bank said. “General shareholders make shareholder proposals in various fields such as corporate governance and dividend expansion.” Goldman Sachs analyzed that with such shareholder proposals, Korean companies showed an unprecedented tendency to increase shareholder returns in 2023 compared to previous years.

Goldman Sachs had a particularly positive view about activist funds, which have been at the forefront of shareholder activism in the report. “In the past, when foreign funds have made shareholder proposals in Korea, they placed top priority on protecting Korean companies, such as protecting their management rights,” the report said. “But in recent years, Korean funds have been at the forefront of shareholder proposals. They have been yielding meaningful results such as improving governance by mobilizing ordinary shareholders.”

Goldman Sachs forecast that the Korean market’s valuation will be able to rise by 22 percent from the current level thanks to such shareholder actions and an improvement in shareholder rights and interests.

“The KOSPI’s price-to-book ratio (PBR) is at a level of 0.9, and we believe there is room for an increase of about 22 percent in the future,” the report says. “Improvements in corporate governance and governmental institutional improvements thanks to shareholder action increased the possibility of the KOSPI being listed on the Morgan Stanley Capital International (MSCI) Developed Markets Indexes.”

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