And yet the country’s stock market keeps hitting records. The Kospi, the Korea’s main equities benchmark, set a record high last week and is up 13 per cent in the year to date, making it one of Asia’s best-performing major markets of 2017.
The market strength illustrates the awesome power of Samsung to propel the wider market to gains and, to a lesser extent, optimism about the election of liberal candidate Moon Jae-in as the new president.
“The Kospi rally has been mainly driven by Samsung,” says Lee Chai-won, chief investment officer at Korea Value Asset Management.
Samsung’s share price — which also hit an all-time high last week — has climbed 28 per cent in the year to date, pulling the rest of the market along with it. Samsung alone has driven about 40 per cent of the Kospi’s gains in the year to date.
Last month, Samsung, which carries a 25 per cent weighting in the Kospi index with a market capitalisation of $288bn, announced a plan to cancel Treasury shares worth $35bn. This will concentrate dividends and ownership rights in the remaining shares, making them more valuable.
“Samsung’s announcement to cancel Treasury shares was a major trigger for the market’s recent rally, although it is doubtful if other Korean companies will take similar steps,” says Lee Chai-won.
The move was done to reassure investors shaken by the incarceration of Samsung’s de facto leader, Lee Jae-yong, who is standing trial on corruption and embezzlement charges.
Samsung recorded its best quarterly operating profit in more than three years in late April on strong prices of computer chips and panels. Positive reviews of its recently launched Galaxy S8 smartphone have also been well timed, coming when investors have been receptive to a Korean revival story.
This has largely been driven by the election of Mr Moon, viewed by investors and analysts as a good candidate to defuse North Korean tensions and fix the country’s entrenched corporate governance problems.
Mr Moon has promised to pursue more engagement with North Korea amid growing military threats from the north. He also wants to resolve the diplomatic stand-off with China over the deployment of a US missile shield while pushing for corporate reform and introduce fiscal stimulus including a Won10tn supplementary budget to reinvigorate the stalled economy.
Mr Moon has also promised to address the country’s entrenched crony capitalism, a project that has come on and off the state agenda since the 1997-98 Asian financial crisis. The government wants the country’s pension fund, the biggest investor in major Korean companies, to adopt a stewardship code while some bills are pending in parliament to strengthen minority shareholders’ rights.
The prospect of improved corporate governance leaves investors hopeful of improved performance, returns and share prices.
“The biggest problem of Korean companies is their inefficient capital allocation,” says Paul Choi, head of research at CLSA, referring to chaebol’s stingy dividend payouts despite their strong cash reserves.
Mark Mobius, the well-known emerging market investor and executive chairman at Templeton Emerging Markets Group, is optimistic that chaebol reform will narrow the discount that investors apply to Korean stocks. “I think chaebol reform should result in better corporate governance and could lift the prices of many South Korean companies,” he says.
This points to the last reason for Korean stocks’ strong recent performance — they have been rising off a low base.
South Korea has historically been undervalued compared with other Asian markets mainly because of chaebols’ poor governance. It remains the cheapest market in Asia, with the Kospi trading at only 0.96 times forward book value, compared with the 2.6 and 2 times multiples seen for India and the Philippines.
The global economic recovery also bodes well for the export-driven Korean economy with its export growth hitting a six-year high. “The economy is making a cyclical recovery driven by rising exports, and there is strong national demand for economic reform,” says Mr Choi.
South Korea remains volatile with the North Korean missile tests on Sunday just a reminder of that market’s many risks.
Experts also expect strong resistance to the main reforms of Mr Moon’s Minjoo party, as the party lacks a majority in parliament.
But recent events have shown that, no matter how fraught South Korea’s domestic political and economic situation may get, a strongly performing Samsung can keep the Kospi buoyant. “It is Samsung that is single-handedly leading the market’s rally,” adds Mr Choi.