South Korea Exchange to launch new stock index to counter low equity valuations

SOUTH Korea’s main securities exchange operator said on Tuesday (Sep 24) it is launching a new stock index, called the Korea Value-up Index, aimed at luring inflows as part of a broader push to boost the local equity market’s depressed valuations.

Korea Exchange said the index will be made up of 100 profitable local companies deemed to have strong shareholder return policies and a track record of complying with government initiatives to narrow a “Korea discount” on stock prices.

The discount refers to a tendency for South Korean companies to have lower valuations than global peers due to factors such as low dividend payouts, and the dominance of opaque conglomerates known as chaebols.

The new index will be launched on Sep 30 for asset managers and mutual funds to use as a benchmark to create exchange traded funds, which retail investors can trade real-time like stocks on an exchange, Korea Exchange said.

“We expect to contribute to the re-evaluation of the Korean capital market as it will be used to develop various index-based products and revitalise investment trends,” it said in a statement.

The government of President Yoon Suk-yeol has been working to end a perennial market discount and boost shareholder returns with steps such as setting long-term targets for return on equity and increasing communications with shareholders.

But the reforms have received a lukewarm response from investors so far, since they rely on the voluntary efforts of companies.

The benchmark Kospi has fallen 1.5 per cent this year, while the S&P 500 and Nikkei have jumped 20 per cent and 14 per cent, respectively.

“This index is the first concrete policy step that could actually create inflows into South Korean markets among other steps taken,” said Lee Jung-bin, analyst at Shinhan Securities, who noted pension and mutual funds are expected to allocate more capital into the market once ETFs related to the index arrive.

Samsung Electronics, SK Hynix, Hyundai Motor, Kia, HMM, Korean Air Lines are some of the companies included in the new index.

In the financial sector, Shinhan Financial Group, Woori Financial Group, Meritz Financial Group, Mirae Asset Securities and Kiwoom Securities were also on the list.

To be eligible for index consideration, the market capitalisation of a security needs to be among the top 400 locally listed companies.

The average return-on-equity (ROE) ratio needs to have remained among the top 100 of its peer group for the past two years, and the company needs to have paid out dividends or repurchased shares for at least two consecutive years.

Korea Value-up index futures will be separately launched on Nov 4, the Korea Exchange said. REUTERS