Peace treaty hype lowers 'Korea discount'

Construction, cement stocks soaring on main bourse

By Yoon Ja-young

As South Korea works at turning an armistice with North Korea into a permanent peace treaty, local stocks are gaining momentum on expectations that the market will overcome the so-called “Korea discount,” or share undervaluation.

The main KOSPI bourse closed at 2,486.1, up 0.25 percent from Wednesday, following a 1.07 percent gain the previous day.

Choi Yoo-june, an analyst at Shinhan Investment Corp., said the diminishing risks ahead of the summit between the two Koreas will significantly reduce the Korea discount. Market watchers believe Korean stocks are undervalued, and they cite geopolitical risk as the biggest discount factor along with the nontransparent governance structure of family owned corporations and low dividend payouts.

He said that tension between the two countries has continued easing since the PyeongChang Winter Games. “Following thawing relations, risk indices are falling. The discussion of a peace treaty is the most positive move ever seen between the two countries. With the lessening of the North Korea risk, which was one of the discount factors on the KOSPI, we can expect positive flow into the stock market on improving investor sentiment.”

Discussions of peace naturally increase expectations of economic cooperation between the two countries.

“Economic cooperation will resume with projects that had been halted, such as tourism to North Korea. The reopening of the Gaesong Industrial Complex will come next,” he said. Taking 80 percent of inter-Korea trade, the joint industrial complex in North Korea was a symbol of economic cooperation before it was shut down in February 2016.

“Regarding the resumption of the Gaesong Industrial Complex, Hyundai Elevator deserves attention,” Choi said, pointing out that it has a 67.6 percent stake in Hyundai Asan which has the rights to develop the complex. “Since Hyundai Asan also has the rights for the tourism business to Geumgang Mountain, Hyundai Elevator will visibly benefit from thawing relations.”

Hyundai Elevator closed at 104,000 won, jumping 16.33 percent from the previous day.

He added that the linking of railways and gas lines between the two countries will come next, though it will take some time. Reflecting such expectations, construction and cement shares are rising sharply.

Hyundai Engineering and Construction rose 12.2 percent to close at 49,650 won; and both Namkwang Engineering and Construction, and Hyundai Cement rose to their daily limit of 30 percent.

Lee Jin-woo, an analyst at Meritz Securities, said that the unification issue would be reflected on financial markets before it takes place.

“When changes that can take the country closer to unification start, the market will reflect it in advance, especially if it goes beyond denuclearization and includes economic changes and cooperation.”

He pointed out that before reunification in Germany, food and beverages, construction and industrial goods companies outperformed the market.

However, Lee said it would be difficult to accurately calculate the risks or the discount of each country.

“Korea ranks at 47th on the Global Peace Index that measures geopolitical risks, which is similar to Taiwan at 40th or the United Kingdom at 41st. The discount stemming from geopolitical uncertainties may not be as big as people think, and it means the impact of the lower tension will be limited.”

He stressed that sustainability of corporate profits matters more in valuation.

“The upgrade in valuation is likely to be triggered by expectations of improving corporate performance led by policies, rather than lower geopolitical risks.”