Initiative to tackle 'Korea discount' bodes ill for Kosdaq

Charts of the benchmark KOSPI and the junior Kosdaq bourses are seen on an electronic board at a dealing room in this undated file photo. Yonhap

The government’s forthcoming initiative to tackle the so-called "Korea discount" is prompting speculation that it may unintentionally encourage investors to dump their stocks in the secondary Kosdaq bourse, thereby causing it to fall sharply.

The Korea discount is a phenomenon in the stock market where its equities are undervalued compared to global peers, due to regulatory policy, corporate governance and geopolitical risks, among other factors.

The negative speculation toward the Kosdaq comes as the Financial Services Commission (FSC) plans to introduce details on the "Corporate Value-up Program," a new financial initiative, within this month.

Initially addressed by the FSC in mid-January, the program is aimed at enhancing the self-assessment of the listed firms and fostering an investor-friendly stock market environment.

It is anticipated to boost the benchmark KOSPI where many of its listed stocks are undervalued – the price-to-book ratio (PBR) was 0.92 at the end of 2023.

PBR measures whether a company’s share price is undervalued, with a number below 1 indicating the stock may be below a fair value.

For investors, the KOSPI’s PBR being less than 1 is deemed as an opportunity to reap huge gains.

But such investor sentiment is apparently working against the Kosdaq.

Its PBR was at 1.77 as of the end of 2023, based on investors deeming that it would not benefit much from the Corporate Value-up Program. In response, investors have tended toward unloading their holdings to purchase KOSPI stocks instead.

“The investors turning away from the Kosdaq would be an unwanted scenario for the government as the Kosdaq is also a crucial part of Korea’s entire equity market,” said Kim Wan-joong, chief economist at Hana Institute of Finance.

He noted the KOSPI slid 5.96 percent while the Kosdaq retreated 7.77 percent in January.

“The steeper pace of decline in the Kosdaq than the KOSPI is believed to be partly attributable to the FSC’s announcement on the Corporate Value-up Program in mid-January, and such pace may accelerate once the details of the program are introduced,” Kim said.

Daishin Securities analyst Kim Jung-yoon also said, “Prospects for the Kosdaq can worsen.”

He explained that the KOSPI-listed companies are far larger than their Kosdaq peers in terms of market capitalization, saying, “They thus have the potential to advance fast in the market when the government’s initiative is successfully adopted.”

While secondary battery-related stocks were considered prospective on the Kosdaq, many of them retreated last month.

For instance, shares of EcoPro, the country’s leading producer of secondary battery materials, plummeted 22.41 percent and its subsidiary EcoPro BM shed 20.74 percent.