[The Editors' Verdict] The 'Presidential Risk' in the Capital Market

Inconsistent Policy Risks Including Short-Selling Ban
Korean Stock Market Ranks Lowest Among Major Countries in January

Even after the start of the new year, the Korean stock market remained at the bottom. Based on the January performance report, it stayed at the lowest rank among major global stock markets, unable to shake off the "last place" label. This is despite President Yoon Suk-yeol's numerous policy remarks from the beginning of the year aimed at resolving the Korea discount (undervaluation of the Korean stock market), whether for election purposes or not.

Experts have pointed out that the cause of the Korea discount is the backward corporate governance. The owner-centered corporate culture and outdated governance structure result in investors avoiding investment in the Korean stock market. Geopolitical risks are also cited as factors. Due to the high proportion of manufacturing companies and an export-dependent open economy system, the market is highly influenced by external variables.

On January 2, the first trading day of the 2024 stock market, the KOSPI fluctuated slightly up and down, while the KOSDAQ started with a slight rise. Officials are tidying up the venue of the 2024 Securities and Derivatives Opening Ceremony held that day at the Korea Exchange Seoul Office Public Relations Hall. Photo by Heo Younghan younghan@

However, in the current capital market, "presidential risk" cannot be ruled out either. Overseas capital criticizes Korea's inconsistent capital market policies. When the short-selling ban regulation was introduced, foreign media unanimously condemned the government's inconsistent and regressive policies. Jim Rogers, chairman of Rogers Holdings, sharply criticized Korea, saying it could never become a major financial hub because it keeps doing foolish things.

The Financial Services Commission has consistently stated its goal of fully resuming short selling and improving accessibility for foreign investors to be included in the MSCI index. However, in November last year, it announced a complete ban on short selling, citing plausible reasons such as rampant illegal short selling and the need to fix a tilted playing field (system). It also drew a line, saying MSCI inclusion was not a priority. The main regulatory body, which was supposed to address necessary tasks for market advancement, abandoned its conviction and philosophy and, following Yongsan guidelines, is going against global standards, which was regrettable.

Foreign investors disappointed by Korea's short-selling ban as a "card for the general election" left the market. Some global sovereign wealth funds and large U.S. hedge funds that rely on long-short (buy and short sell) strategies reduced their investment proportions in the Korean stock market. They redistributed these funds to Japan, India, and other markets. Ultimately, the government ended up helping the recent rallies in the Japanese and Indian stock markets.

There is also a view that if short selling had not been banned and foreign investors had stayed, the KOSPI would have reached 2800 by now. The largest domestic "big player," the National Pension Service, is reducing its domestic investment proportion as it cannot expect returns from the KOSPI. The reason for the KOSPI's "solo sluggishness" at the end and beginning of the year was clear.

Recently, the Financial Services Commission announced a corporate value program to boost the stock market, causing the KOSPI to briefly rally. It plans to recommend listed companies set targets for price-to-book ratio (PBR) or return on equity (ROE) to enhance corporate value. However, improving PBR without institutional support can distort the market and cause damage from theme stock fever. The emergence of a strange phenomenon of low PBR stock theme fever proves this. There is even a joke that these are theme stocks designated by the president targeting the general election. Since this is a soft norm, companies are unlikely to voluntarily participate. It would be efficient to establish a hard norm through the Commercial Act that protects "proportional shareholder interests," but amending the Commercial Act is a distant prospect. Ultimately, it is the government's will to execute and the authorities' leadership that will continuously drive corporate change beyond just election purposes.

Only by escaping the distorted structure where only retail investors thrive while foreign and institutional funds flow in can the KOSPI trend upward. Reforming governance and dividend systems to be shareholder-friendly and promoting capital policies aligned with global standards will enhance the trust of major investors. When the capital market sheds the "presidential risk," spring will come to the Korean stock market as well.

This content was produced with the assistance of AI translation services.