Weekly Buzz: đ South Koreaâs taking notes from Japan
Japanâs stock market has been on a hot streak after a series of corporate governance reforms. Itâs pushed companies to buy back shares, cut down on complicated cross-holdings, and beef up dividend payouts. Now South Koreaâs looking to take a page from Japanâs playbook.
Whatâs going on here?
Investors seem to value South Korean companies less than their peers. Itâs a phenomenon prevalent enough that pundits have coined a term for it: the âKorea discountâ. This lack of investor enthusiasm for South Korean stocks is often linked to the influence of the hulking, opaque conglomerates known as chaebols.
Low shareholder returns are another big reason behind the âKorea discountâ. South Korean companies have historically been pretty tight-fisted with dividends, paying out the least in the region, Japan excluded.
Itâs why the countryâs now rolling out its Corporate Value-up Program, a series of initiatives which includes pushing its companies to share more of their wealth with stock investors. Similar reforms in Japan have worked to boost confidence in its market.
While previous attempts to elevate South Koreaâs stock valuations werenât a smash hit, this time might be different. Japanâs recent success serves as a powerful example, with a notable shift toward greater capital efficiency for Japanese companies. And South Koreaâs seeing a wave of new retail investors, nearly triple the amount since five years ago. This renewed interest in its stock market may work to support the countryâs new value-boosting initiatives.
Whatâs the takeaway here?
Even without corporate reforms, South Korea might still be worth a look. The countryâs firms are poised to benefit from global trends, including rising geopolitical tensions and a surging demand for tech. If youâre looking to invest in the country, our Flexible portfolios might be a good choice: simply create a portfolio from scratch and select âSouth Koreaâ under âGlobal Equitiesâ.
đĄ Investorsâ Corner: The dollar milkshake theory
The US dollarâs been strengthening all year â and itâs making for awkward conversations among trading partners. If the US dollar is strengthening, that means other currencies are weakening. And a severe slump can stress closely-linked economies like Japan and South Korea â so itâs no wonder their finance ministers are raising their voices.
The dollar milkshake theory explains what happens when there just arenât enough US dollars to meet rising demand. As the currency strengthens, countries that carry USD-denominated debt see their repayment costs rise, increasing the risk theyâll miss a payment.
These potential defaults, in turn, boost the dollarâs demand even more, because of its status as a safe haven in times of uncertainty. In worst-case scenarios, the milkshake froths up a global debt crisis, sending other currencies sliding and icing over a lot of portfolios.
While the theory is a little alarming, it does teach us some of the mechanics running global economics. The US dollar effectively holds the worldâs financial system together. As the worldâs primary reserve currency, itâs the financial buffer countries use to handle shocks. And because major commodities like oil are priced in dollars, changes in the currencyâs value have far-reaching effects, influencing costs worldwide.
These articles were written in collaboration with Finimize.
đ Simply Finance: Book value ratio
The book value ratio, often referred to as the price-to-book ratio (P/B), is the bargain hunterâs tool. It's calculated by dividing the market price of a company's stock by its book value, which is the net worth of the company if you were to liquidate all its assets and pay off all its debts.
The P/B ratio offers insight into whether a stock is trading at a premium or discount â the lower the ratio, the better the deal you're potentially getting. Keep in mind however, a low book value ratio might also signal that there may be reasons why a company isnât favoured by the market.
⨠Featured in App
đ Growing your cash has never been so SimpleÂ
Simple Cash portfolios are ultra-low risk, offer 3.7%â4.6%* p.a. on any amount, and you can also leverage the power of compound interest, allowing your wealth to snowball over time.
*3.7% p.a. represents the projected rate for Simple. 4.6% p.a. represents the yield to maturity for Simple Plus, as of 29 February 2024.
Want more?
We thought you might.
Join the hundreds of thousands of people who are taking control of their personal finances and investments with tips and market insights delivered straight to their inboxes.