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South Korea Heading in the Right Direction

South Korea's benchmark KOSPI index is courting its all-time high following the election of President Moon Jae-in on May 10.

Although it is still too early to assess the policy priorities of President Moon, the appointment of several non-political professionals to key posts and plans to improve corporate governance through legislation are expected to have a positive impact on the market, setting the stage for further growth.

One of the main drivers of the KOSPI has been Samsung Electronics Company Limited (SEC) which is up 100.3% over the past 12 months ending April 30, compared to the index which is up 23.5%. Despite noise surrounding the chairman facing corruption charges, SEC beat earnings expectations the last few quarters. 

Incidentally, SEC is the largest holding in the Excel Emerging Markets Fund, benefitting its investors. More important, SEC’s efforts to improve corporate governance have appeased rising public discontent over the economic and political influence of Korean chaebol groups. Since late 2015, SEC has implemented several shareholder-friendly measures such as a higher dividend payout and share buybacks.

 

Once seen as a benefit to the Korean economy, chaebols have lost favor with the people and the government, putting an end to their traditional cozy relationship. The Moon government is expected to introduce corporate governance legislation that will have a significant impact on reforming the structure of chaebols.

Among the potential areas for new legislation are:

  • Legality of cross-shareholdings
  • Treasury shares being used as voting shares after holdings company conversion
  • Appointment of independent board members
  • Online proxy voting in AGM

The Moon's policy advisory committee has also pressed the Fair Trade Commission FTC to provide hard  guidelines in regulating practices of major chaebols, especially those with financial subsidiaries.

According to the new head of the (FTC), Kim Sang-jo, who is a professor of economics and a civic activist: “The reason why there needs to be a chaebol reform is because the country’s corporate ecosystem has become distorted and the fair order distorted by the governance structure of the chaebol.”

Even more significant is the newly created post of chief of staff for policy, filled by Professor Jang Ha-sung. Professor Jang is well-known as Korea's foremost critic of chaebol families’ corporate governance practices and has written many academic papers on the issue. “Korea has no peer among OECD economies which conglomerate groups dominate the economy. Korea is devoid of entrepreneurial culture; instead, wealth is passed down via inheritance, he reported saying in an election campaign speech.

In his effort to enhance confidence in his government, President Moon has also announced several key appointments, including naming veteran civil servant Kim Dong-yeon as deputy prime minister for the economy and finance minister; and senior United Nations diplomat Kang Kyung-wha as foreign minister.

In announcing these appointments, he provided some perspective of his plans, saying “The new government was launched at a time of unprecedented low growth, wealth disparities and a crisis for people’s basic livelihoods. Overcoming this crisis, creating jobs and energizing the economy are the most important tasks of the government.”

Evidently, Moon plans to set Korea on a path of revival which should be positive for the country and the financial market. 

 

Sources:

[1] https://www.excelfunds.com/index.php/excel-emerging-markets-fund-series-a-overview

[2] http://koreajoongangdaily.joins.com/news/article/Article.aspx?aid=3033651

 

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Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

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