Stepping up to Korea Premium

Definition of Korea Discount & Korea Premium

Korea discount and Korea premium are words used in a stock market signaling investors’ perspectives of Korean stock prices and earnings. As their names indicate, the Korea discount is the amount by which investors underrate Korean stocks while the Korea premium is the amount by which investors overrate Korean stocks.

Global Status of South Korea

What about South Korea? Korean people are so proud of their country finding out so many foreign people using cell phones and driving cars that were all made in Korea. However, most of those foreign people probably think that their fancy cell phones and nice cars are too good to be made in Korea, and it seems like that this prejudice influences the global status of South Korea in international stock markets.

As the above charts show, South Korea was ranked 36th last year for credit rating in international stock markets, which is pretty low considering high values of Korean companies such as Samsung, LG, Hynix, and etc. South Korea, the nation seems to be viewed as a discount by foreign investors. How did it happen?

Factors that Exaggerate Korea Discount

Though global companies that are all Korean have been maintaining top ranking, some stubborn factors are still bothering foreign investors to change their thoughts about the Korea discount.

One predominant factor is South Korea’s geographic proximity to North Korea. Whenever North Korea becomes at issue, the KOSPI stock index tumbles down, which comes right back in few days. For example, the latest tension between South Korea and North Korea that was caused by the South Korean Navy ship, “Cheonanham” certainly influenced the KOSPI index to fall down. Although the fallen amount that bounced right back for sure was little, this indicates that a lot of foreign investors are still frightened that there are ongoing tensions between two Koreas that can provoke a war any time soon.

Moreover, the South Korea’s national brand value is not as high as values of corporate brands. A lot of people still think that famous brands like Samsung, Hyundai, and LG are not made in Korea. Although some Korean companies are dominating world market shares, this seems to be not sufficient to elevate the national brand value.

Stepping up to Korea Premium

Considering this tendency of the Korea discount, South Korea’s being chosen as 2010 chairman country of G-20 and Seoul’s being picked as the venue for the November G-20 leaders meeting last year are definitely good opportunities to enhance the global status, which will help to become Korea premium as well. Also, Moody’s Investors Service raised South Korea’s national credit rating from A2 to A1, which is the level the country had before the Asia financial crisis in 1998.

Even though there are some signs that indicate a shift from Korea discount to Korea premium, constant efforts to qualify South Korea’s national brand value will be needed.


2 Responses to Stepping up to Korea Premium

  1. Don says:

    This is indeed an interesting issue worth pondering about. Well delivered, but I want to rebut some of the points that are made here.
    First off, I am not sure whether the factors such as national brand name or companies’ brand name are determinants of country risk premium. In practice, country risk premium could be derived from ratings that are assigned from credit rating firms. As you mentioned, currently Korea is assigned A1 from Moody’s, which is still 4 levels below the top. According to Moody’s Jan 2010 data, A1 rating had 90 basis points of default spread. On top of that, we have to scale up that figure, factoring in US’s risk premium, equity market volatility, and bond market volatility. So, if Korea wants to lower its sovereign risk premium, it will have to overhaul the factors listed above, not some ambiguous and subjective factors such as national brand name or anything.
    Second, I am very contented to hear that Korean companies are doing such well even during the global recession. It exemplifies the fact that Korean companies are in much better shape than before and are to some extent resilient from external factors. But, we have to seriously think about whether Korean companies are actually contributing to lowering the country risk premium. I know that Korean companies’ operations have become much global lately, but one way to work on this problem could be spreading out operations and factories to other countries, as the risk premium is largely determined by where a company conducts its operations. However, at this point of time, it will be hard to argue that Korean companies are actively diversifying their risks. Furthermore, considering the shaky prospects of the labor market in Korea, this could be incompatible with the government’s objective, which is lowering the unemployment rate.
    In short, in order to tackle this issue, more fundamental and long-term approaches are needed.

  2. Pingback: CreditLime – CDS Market Information » Blog Archive » Korean CDS heading south

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