Seoul, South Korea – When Park June-soo, 38, canceled a long-awaited trip to the UK last year due to the pandemic, he decided to invest his travel budget in the stock market instead.
It was the first time that Park, an art fair manager in Seoul, bought shares.
Although he was no stranger to the idea of investing in the stock market, he was skeptical about risking his hard-earned money.
“Stocks didn’t strike me as a reliable way to invest,” Park told Al Jazeera. “When I was young, my mother would spend hours at a computer trading stocks, but with little in return.”
South Koreans have historically invested little in financial assets such as stocks, with the lion’s share of an average household’s portfolio being taken up by real estate.
The ratio of household financial assets to non-financial assets is one of the lowest among developed economies.
However, the South Korean stock market experienced an annus mirabilis in 2021. The benchmark KOSPI index crossed the 3,000 mark for the first time in its history in January of the same year.
Retail investors, including Park, rushed.
According to official statistics, the number of shareholders of listed companies in Korea nearly doubled last year.
The Korea Financial Investment Association noted a similar trend in the number of active business accounts, which overtook South Korea’s population last year.
For Park, the success of his friends was the key factor in allaying his doubts.
“I saw that many around me were earning a lot on the stock market,” he said. “So I started by asking for their recommendations.”
While low interest rates globally were a key driver of the stock market boom, analysts say several local factors fueled interest in the South Korean market.
“The surge in property prices discouraged many retail investors, so they sought more accessible opportunities in the stock market,” Chunuk Hong, director of Richgo Investment, told Al Jazeera.
“And the widespread use of social media has also contributed to this. As a famous Korean saying goes, “The most unacceptable thing in the stock market is to see my stupid neighbor bragging about his success.”
Some activists hope the boom will be a catalyst for reforming the market, which has long suffered from what investors call the “Korean haircut.”
Despite the strong performance of South Korean companies, their stocks are undervalued compared to their overseas competitors. Last month, the South Korean market traded at a price-to-book ratio of 1.17, according to investment research firm MSCI, compared to 1.84 and 2.99 for its emerging and global market indices. , respectively.
Weak corporate governance
The historic undervaluation is often attributed to weak corporate governance, a remnant of the family chaebol system embodied by corporate titans such as Samsung and Hyundai.
Kevin Kim, chairman of the Korean Corporate Governance Forum, told Al Jazeera that market oversight was too lax to prevent majority shareholders from working against the interests of minority shareholders.
“The return of South Korean companies’ capital to shareholders has been meager, as there are many things companies are allowed to do with internal reserves only for the benefit of majority shareholders,” Kim said.
Kim cited LG Energy Solution’s public listing as a recent example of the problem.
Spun off from LG Chem last month, the battery maker became the country’s second most valuable company just after listing.
While many LG Chem shareholders were not offered any shares and suffered massive losses when the parent company lost its most valuable division, LG Chem’s majority shareholders were able to raise capital without losing control of the company. split.
“If this had happened in the United States, shareholders would have launched a class action lawsuit against the board, and the board should have paid astronomical damages to shareholders,” Kim said.
Kim said the South Korean stock market needs more comprehensive shareholder protection, including looser requirements for class action lawsuits and pre-trial proceedings like discovery.
While analysts say the government has been slow to consider reforms, the growing number of voters with a stake in the market has increased political momentum for change.
Ahead of the South Korean presidential election on March 9, the four main candidates have pledged to strengthen the protection of minority shareholders.
Some candidates also promise to reduce taxes for investors.
Yoon Suk-yeol, the candidate of the Conservative People’s Power Party, has vowed to drop the government’s plan to widen the scope of capital gains taxes in stock trading, while the candidate of the ruling party of left Lee Jae-myung offered tax relief for long-term investment.
“Before, the government didn’t care whether investors lost or not,” Hong said. “But now a significant number of the economically active population is involved in the stock market.
“All of this could affect the polls. It is encouraging, in our view, that the ruling party and the opposition are now examining unfair practices in the stock market.