[Yoo Choon-sik] Would you buy South Korea?

It is always heartwarming to meet a close friend after a long time. I experienced such a joyful moment last week when I reunited with a former colleague I had worked with at the same company, in the same area of macroeconomic reporting, after many years, during his visit to Seoul for a holiday.

We discussed many topics, ranging from our daily lives since leaving the company several years ago to our thoughts on the outcome of the US presidential election — which had been decided just hours before we met in central Seoul — and major economies’ future prospects.

Our conversation was largely relaxed until he posed an intriguing question that apparently relates to his current role of editing economic reports written by journalists. “Will you buy South Korea now?” he asked, adding that he wasn’t just referring to the stock of South Korean companies.

It wasn’t an easy question to answer immediately — or at least that’s how it felt initially. After a moment, I replied, “Hmm, I would say ‘no’ in the short term, but ‘maybe yes’ over the long term.” I don’t precisely remember what I took into consideration when I answered.

I didn’t directly mention the generally disappointing results achieved since the government announced an ambitious plan earlier this year dubbed the Corporate Value-up Program, aimed at boosting the value of shares in strong companies undervalued due to the so-called “Korea discount.”

The administration of President Yoon Suk Yeol launched the program in February with the aim of making investments in South Korean shares more appealing. Since then, more details about the program have been disclosed through news conferences by top policymakers, international seminars for scholars and market experts, and the publication of research papers.

However, these details seem to have failed to boost investor confidence in the program or South Korean assets overall, as reflected in stock prices and currency movements. Investors realize that South Korea’s Corporate Value-up Program relies primarily on voluntary efforts by companies to improve shareholder value.

For instance, the Kospi is currently trading 4 percent below its level from the beginning of this year. This performance contrasts starkly with the impressive gains of stock indices in other countries with which South Korea’s economy is often compared, due to their close relationships or similarities.

During this period, Taiwan’s main stock index rose 32 percent, the US’ Nasdaq composite index jumped 31 percent, Japan’s Nikkei 225 index surged 19 percent and China’s Shanghai Stock Exchange index increased 17 percent. Even Israel’s main stock index, despite its wars in the Gaza Strip, Lebanon and elsewhere, recorded a notable gain of 16 percent since the start of the year.

These developments are taking place even as the government touts a sharp rebound in exports, led by key export items like semiconductors, ships, automobiles and industrial machinery. The government announced earlier this month that overseas sales in October rose 4.6 percent on-year to $57.52 billion.

October marked the 13th consecutive month that exports rose on-year and the third month in which overseas shipments broke the monthly record, according to the Ministry of Trade, Industry and Energy. It’s hard to deny that this strong export performance bodes well for the overall economy, corporate earnings and, by extension, stock prices.

However, the reality is quite the opposite: Korea’s economic growth remains sluggish, corporate earnings aren’t increasing quickly enough to excite investors and stock prices aren’t rising at all — particularly when compared with markets in significant economies like the US, Taiwan and Japan.

The Seoul stock market hasn’t responded strongly even after the Democratic Party of Korea, the main opposition party holding more than half the seats in parliament, agreed to the ruling party’s demand to cancel the planned investment income tax scheme.

Under the investment income tax, which had originally been set to take effect next year, capital gains over 50 million won (about $37,000) from stock investments would have been subject to a 20 percent tax, while gains over 300 million won would have incurred a 25 percent tax.

Investors had long demanded the cancellation of this plan, arguing that it would impose “double taxation” and push investors away from the local market. Yet the Seoul stock market hasn’t risen as anticipated since the main opposition party agreed to cancel the tax, and investors continue to favor overseas markets for higher returns.

Underlying this gloomy outlook is the disappointing economic performance in both the present and predicted for the near future.

The government is cutting spending, the central bank is hesitating, companies are not significantly increasing domestic investment or employment, households are not borrowing more, and their income is growing too slowly to support more consumption.

What went wrong and who is to blame? Ask yourself: “Would you buy South Korea?” And, “If not, why not?”

Yoo Choon-sik

Yoo Choon-sik worked for nearly 30 years at Reuters, including as the chief Korea economics correspondent, and briefly worked as a business strategy consultant. The views expressed here are the writer’s own. — Ed.