Easing 'Korea discount' key to revitalizing stock market: Korea Exchange chief

Korea Exchange Chairman Sohn Byung-doo speaks during an interview at its headquarters in Seoul, Dec. 22. Courtesy of Korea Exchange

ESG management crucial for more foreign capital inflow: KRX chairman

By Lee Min-hyung

The Korea Exchange (KRX) will place its 2023 policy focus on winning back trust from foreign investors by easing the so-called "Korea discount," Sohn Byung-doo, chief of the exchange operator, told The Korea Times during a recent interview.

The 'Korea discount' is used to describe a lower valuation of local shares than their global counterparts for reasons such as geopolitical risk factors and the rigid corporate culture here.

"The phenomenon is mainly attributable to weak corporate governance structure, as is shown from the low level of shareholder return policy and controlling shareholders' excessive pursuit of profit," Sohn said during the interview on Dec. 22.

To attract more foreign capital inflow, he underlined the dire need for listed firms to expand their environmental, social and corporate governance (ESG) activities. The exchange operator also pledged to play a role in helping encourage more companies to engage in diverse ESG activities to dispel investors' lingering concerns about such risk factors.

"Listed firms are advised to pay more attention to building sound governance structures, introducing a more shareholder-friendly management system and developing corporate culture for ESG management," he said. "We will also keep coming up with other measures to lead them to improve their governance structure in a more transparent manner."

The remark came amid an increasingly bleak stock market outlook here and abroad. Even if the ongoing cycle of rate hikes nears its end, chances appear slim for the U.S. Federal Reserve or the Bank of Korea to take steps to cut interest rates anytime soon. The rate uncertainty is forecast to remain in place for the first half of 2023, and the stock market is unlikely to regain momentum for a rally in the foreseeable future.

"The dominant outlook is that the Fed will maintain its rate hike policy for some time next year, which will heighten uncertainty in the market," he said. "Market experts share a broad target range of the benchmark KOSPI next year, which is within a band of 1,900 and 2,800. The broad range indicates the market is extremely hard to predict in 2023."

The main bourse soared to a historic high of 3,300 points in June 2021, but has since had to return most of its gains this year after investors went on a selling spree on fears of steep rate hikes by the Fed. The KOSPI has been hovering at around the 2,300-point level since mid-December.

The pessimistic macroeconomic outlook is also sparking concerns over marginal firms' successive bankruptcies.

Korea Exchange's office building in Seoul / Courtesy of Korea Exchange

Sohn said the KRX is on high alert over the possibility of such scenarios next year.

"The global economic slowdown has created an environment where listed firms' earnings and business conditions can be aggravated at a rapid pace," he said. "The exchange is committed to protecting investors and stabilizing the market even in the worst-case scenario. We will immediately notify investors of listed firms' possible bankruptcies. We have also eased the rules on the requirements for delisting, so as for listed firms to obtain opportunities for revival."

However, he raised expectations that opportunities may come even in this period of uncertainty.

"We have set up specific ESG criteria, and do the utmost to foster a culture of ESG management across the stock market to mitigate foreign investors' long-standing complaints over Korean firms' opaque management structures," Sohn said. "These efforts may not generate immediate outcomes, but will serve as a stepping stone for the market's robust rebound when it is revitalized."

He also shared his viewpoint on the volatile crypto industry, underscoring the urgent need to introduce regulatory hurdles to regain trust from investors.

"The crypto market will also be able to mature when specific regulatory systems are established," he said. "The biggest risk factor surrounding the crypto market is the weakening credibility in the eyes of investors. Such worries can be alleviated via institutional efforts. When fair and transparent rules are introduced, investors' confidence will be restored rapidly."

Korea Exchange's headquarters in the nation's southeastern port city of Busan / Courtesy of Korea Exchange

MSCI inclusion

Korea is making government-wide efforts to win the MSCI's developed market status, as part of a years-long bid to clear away risks stemming from the Korea discount and achieve another big leap forward for the market.

"We held talks with MSCI Chairman Henry Fernandez in early November, and shared our willingness for the drive," Sohn said. "According to the MSCI, obstacles surrounding the issue included Korea's absence of an offshore currency market for the Korean won, foreign investors' mandatory registration of their information before making investments here and regulations on derivative products' overseas listing."

Sohn went on to say that the KRX is teaming up with relevant financial authorities and the government over revising outdated investment policies.

"The exchange will engage in a series of activities to enhance communication with global institutional investors via web seminars, conferences and roadshows, and share our efforts on policy changes."

The KRX is also stepping up regulatory efforts to root out the illegal short-selling of shares and other forms of market destabilization activities.

"The exchange has created a division dedicated to monitoring illegal short-selling," he said. "For now, we are running three teams with 18 members. The financial authorities will make public the names of those who engaged in any illegal short-selling or unfair trading acts."

The introduction of the nation's first alternative trading system (ATS) has drawn keen attention amid hopes for more foreign capital inflow. When the non-exchange trading platform makes its debut here tentatively around 2024, the KRX's decades-long monopolistic status will be broken.

Sohn expected the ATS to build an environment fostering fair competition in stock trading services.

"The exchange will not just compete, but cooperate with the ATS for stable financial market management," he said. "Investors will benefit from their intense competition in areas such as the speed of stock orders and transaction commissions," he said.

"Aside from the competition, the exchange will partner with the ATS for the protection of investors by stepping up market observance."