<Value Up Index> Announcement Countdown "Supply and Demand Expectations Exist, but the Essence is Governance Reform"

Market attention is focused on the Value-Up Index, which is scheduled to be announced this month. Industry experts have evaluated that the Value-Up Index could have a positive impact on the domestic stock market from a supply and demand perspective. However, they emphasized that the effect of Japan's Value-Up Index was not as significant as expected, and that governance reform is ultimately key for the Value-Up Index and related exchange-traded funds (ETFs) to lead to tangible results.

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According to the financial investment industry on the 3rd, the Korea Exchange plans to announce the 'Value-Up Index' this month, which consists of companies with excellent corporate value and those expected to have value-up potential in the future. In the fourth quarter, the exchange plans to launch ETFs linked to this index to encourage investment in the Korean stock market.

The exchange intends to comprehensively consider key investment indicators such as price-to-book ratio (PBR), price-to-earnings ratio (PER), return on equity (ROE), dividend payout ratio, dividend yield, and cash flow. Investors expect that companies included in the Value-Up Index will contribute to resolving the Korea discount (undervaluation of the Korean stock market) through continuous profit generation and shareholder returns.

In July last year, Japan announced the Value-Up Index called the 'JPX Prime 150 Index.' The Tokyo Stock Exchange selected excellent companies based on two criteria: financial-based 'return on capital' and future information and non-financial-based 'market evaluation' among companies listed on the Prime Market, the top-tier market of the Japanese stock market, and launched the index.

However, contrary to investors' expectations, Japan's Value-Up Index did not show outstanding performance. In the first quarter of this year, when the Japanese stock market was strong, it underperformed the Nikkei 225, Japan's representative index. The effect of attracting funds through ETFs tracking the Value-Up Index was also limited. There are two ETFs tracking the Value-Up Index, but their assets under management (AUM) rankings are only within the top 100 and top 200, respectively.

Yeom Dong-chan, a researcher at Korea Investment & Securities, said, "It is natural to have expectations of stock price increases for companies included in the Value-Up Index when it is announced in Korea," but added, "However, looking at the Japanese case, funds did not flow strongly into Value-Up ETFs, and it should be remembered that it takes 2 to 3 months from the announcement of the Value-Up Index to the establishment of ETFs." He continued, "In principle, the Value-Up program aims to enhance long-term shareholder value through shareholder returns," and pointed out, "Short-term stock price increases due to concentrated supply and demand are not the essence."

Ahead of the Korea Exchange's announcement of the Value-Up Index, active social discussions are underway emphasizing that corporate governance improvement is essential to resolving the undervaluation of the Korean stock market. On the 28th of last month, Lee Bok-hyun, Governor of the Financial Supervisory Service, stated at a meeting with capital market-related research institutions, "There continue to be cases where domestic and foreign investors are greatly disappointed by decision-making solely for controlling shareholders," and added, "It is necessary to consider improvement measures."

Accordingly, voices from the financial investment industry suggest that rather than simply expecting short-term supply and demand effects from undervalued companies, it is necessary to invest in companies that actually improve governance. Lee Kyung-yeon, a researcher at Daishin Securities, said, "Instead of only approaching low PBR or sectors benefiting from value-up, it is necessary to select companies that show a proactive attitude toward enhancing corporate value," and pointed out, "Considering that the Value-Up program is especially a governance-centered reform, governance aspects such as shareholders, the board of directors, and audit systems are important."

In particular, institutional supplementation for protecting minority shareholders seems necessary for governance-centered corporate value-up. Lee Bo-mi, a research fellow at the Korea Institute of Finance, said, "To enhance corporate value, it is necessary to prevent arbitrary actions by specific shareholders or management and protect the rights of ordinary shareholders," and added, "In this regard, it is necessary to refer to the 'Guidelines on Minority Shareholder Protection and Group Management' announced by the Tokyo Stock Exchange in December last year." She continued, "The guidelines recommend establishing a system involving independent outside directors to protect minority shareholders and maintaining continuous dialogue with them," and emphasized, "Korea should also set specific protection measures and accumulate cases to raise awareness of protecting the rights of ordinary shareholders by companies."

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