Korea Discount: Why Korean Stocks Are Chronically Undervalued
If you've invested in the Korean stock market, you've probably wondered at least once: "Why are Korean stocks always considered undervalued?" Today, let's dive deep into the structural causes behind the Korea Discount phenomenon.
📊 The Shocking Truth About Return Distribution
When we analyze Korean stock market returns from 1982 to 2026—a span of 44 years—the results are truly startling. The most frequently occurring annual return is -10%. Despite an average annual return exceeding 7%, the probability of experiencing a loss in any given year is nearly 50%.
In a market where the win rate is only 55%, the phrase "just invest for the long term" might be nothing more than marketing jargon. Why is the Korean market so risky, and why are returns so unstable?
💰 The Reality Behind a 1% Dividend Yield
The most direct cause of the Korea Discount is the extremely low compensation to shareholders.
- Korea's average dividend yield: 1% (25-year average)
- SK Hynix dividend yield: 0.1%
- Taiwan's payout ratio: 55%
- Korea's payout ratio: 26%
Even when earning 100 trillion won, Korea only distributes 26 trillion in dividends. That's even lower than China. This is exactly why TSMC's market cap is three times that of Samsung Electronics.
🏢 The Trap of 62% Internal Ownership
Korean chaebols have a peculiar ownership structure. While owners directly hold only 1% of shares, internal ownership through affiliates reaches 62%.
Why is this problematic?
- Hostile M&As are impossible - All external attempts to change companies have failed
- No incentive to pay dividends - Even if they distribute 100 trillion, owners only receive 1 trillion
- 49.6% comprehensive financial income tax - Half of that goes to taxes anyway
- Refusal to retire treasury shares - Using governance threats as excuses to avoid shareholder returns
In this structure, why would owners bother to increase dividends or enhance shareholder value? Honestly, there's no reason.
📉 The Limitations of Activist Funds
Recently, activist funds have become more active in Korea. This is certainly a positive change. But unfortunately, we've never seen them win.
- Shareholder proposals are increasing, but actual impact remains minimal
- External shareholders' voices are powerless against 62% internal ownership
- Even the National Pension Service sides with owners
- Most individual investors support management too
Why do individual investors side with management? Frankly speaking, they don't know better. And some financial media frame activist funds as "speculators."
🌍 Global Comparison of Undervaluation
Comparing PBR (Price-to-Book Ratio) across countries:
| Country | PBR |
|---|---|
| USA | 4.7x |
| Japan | 2.0x |
| Korea | 1.0x |
Korea reached 1.7x just before the 2007 Global Financial Crisis. Currently at 1.2-1.4x, it remains significantly undervalued compared to other countries.
Countries with higher payout ratios trade at higher valuations—this is no coincidence.
🎯 Structural Undervaluation Won't Change Easily
In conclusion, the Korea Discount is a structural problem.
- Even if dividend taxation reforms are implemented
- Even if mandatory treasury share retirement is enacted
- With internal ownership at 60%, fundamental change remains difficult
Rather than placing too much hope in the Korean stock market, a diversified asset allocation strategy that doesn't bet everything on a single market might be the wiser choice.
In the next article, we'll explore Korean stock investment strategies that can still generate returns despite this challenging environment.