By Park Hyong-ki
Staff Reporter
For years, Korea has been criticized for having poor accounting and financial disclosure systems, which have caused the equity market to be highly undervalued by global investors.
Investors' lack of confidence in such governance structures in corporate society weighed down the securities market, which has been dwarfed under the influence of the so-called Korea Discount.
However, with the local stock market breaking the 1,000 trillion won mark in market capitalization for the first time, the ``Korea Discount'' seems to be gradually disappearing, analysts say.
``The market is still being tested regarding its transparency and governance, which haven't yet reached a satisfactory level,'' said Oh Hyun-seok, a senior analyst at Samsung Securities. ``But the 1,000 trillion won market capitalization is significant in that the equity market is showing the potential for further growth.''
As of Wednesday, the market capitalization reached 1,014.2 trillion won as investor confidence was bullish riding on global rallies, according to the Korea Exchange.
Now, the market capitalization accounts for nearly 120 percent of gross domestic product, catching up with other nations such as the United States and the United Kingdom whose market cap-GDP ratio stands above 120 percent.
Korea's stock market ranked 16th in terms of market capitalization among the members of the World Federation of Exchanges.
``Looking at the comparison between market cap and GDP, we can say the Korea Discount is slowly abating,'' said Kang Moon-sung, an analyst at Korea Investment & Securities.
Nevertheless, the road ahead for the stock market remains tough, given that Korea's price-earnings ratio (PER) of about 13 times for this year is lower than the world's emerging markets' average of 15 times, though Korea's market capitalization stands out among those markets.
Kang said the gap in PER between emerging nations is getting smaller, indicating that ``the local market is going in the right direction.'' Korea is classified as an emerging market by global investors.
Rather than seeing whether the Korea Discount will dissolve or not based on market capitalization, it is now high time to focus on how the equity market can improve with its premiums, analysts say.
``I believe we have to see beyond such data and evaluate the market by taking account of other factors such as credit ratings and geopolitics where major developments can certainly boost the market further,'' said Oh of Samsung Securities.
Moody's Investors Service's possible upgrade of Korea's sovereign ratings is expected to add momentum to the removal of the Korea Discount.
``Korea's favorable macroeconomic performance will continue over the near term,'' said Moody's Senior Vice President Thomas Bryne. ``The future fiscal cost to South Korea from its engagement with North Korea is most likely manageable and is consistent with South Korea's credit ratings and ceilings.''