The chaos in Korea further intensified investors' concerns about the country's stocks.

• In 2024, South Korean stock markets experienced a decline, with the "Korea discount" widening compared to other global peers.
• According to CNBC, analysts believe that the efforts to remove Yoon may hinder and postpone efforts for capital market reform, thereby deepening the "Korea discount."

The "Korea discount" in South Korean stock markets has widened compared to other global peers, and the recent political upheaval is expected to further entrench this phenomenon in 2024.

The "Corporate Value-Up" program, announced in February, has not been successful in addressing the "Korea discount" as evidenced by the 7% loss of the country's benchmark stock index, Kospi, this year.

South Korean securities are trading at lower valuations compared to regional peers due to concerns over corporate governance at large family-owned conglomerates that dominate the country's economy.

Since President Yoon Suk Yeol imposed and then revoked martial law within hours, the political turmoil in the country has caused the Kospi to underperform the MSCI Asia ex-Japan index by 2.3 percentage points.

The "Value-Up Program" has been negatively impacted by the increase in the risk premium for Korean assets due to the attempt at martial law, according to Vishnu Varathan, managing director and head of macro research for Asia ex-Japan at Mizuho Securities in a Dec. 10 note.

Under Yoon's leadership, South Korea aimed to enhance its stock markets and overcome the "Korea discount" through a Japan-style initiative that focused on enhancing corporate governance and boosting investor involvement.

The Korea Exchange index has a price-to-book ratio of 0.86 and a price-to-earnings ratio of 13.65 as of Dec. 12. Both metrics have decreased from the previous year, indicating that investors value the index less.

The stock benchmark's price-to-book ratio is 1.44, while its price-to-earnings ratio is 15.90 as of Dec. 11.

As Japan's stock market rose after implementing measures to boost it, South Korea has been facing challenges. For example, the "Korea-Value Up Index," launched in September, which includes 100 listed "best practice" companies that adhere to the "Value-Up" program, has a price-to-book ratio of 0.99 and a price-to-earnings ratio of only 10.29.

The removal of Yoon from power amid a fragile government and divided politics may weaken and delay efforts to increase equity valuations, according to Varathan. He also stated that the power balance in South Korea could shift in favor of large and influential conglomerates, which could further deepen the "Korea discount."

Several global conglomerates in South Korea are family-owned and controlled by the founder's family, consisting of a single group of companies or multiple groups.

The notable chaebols, such as Samsung Electronics, LG, SK, and Hyundai, are significant contributors to the country's GDP. However, due to their intricate shareholding structure, investors have limited influence over the companies' strategic decisions.

South Korean media reports that the four largest conglomerates contribute approximately 40% to the country's GDP.

Lorraine Tan, director of equity research for Asia at Morningstar, stated that market reforms may face obstacles due to political turmoil. However, she emphasized that the reforms will not be halted. Tan believes that the longer the leadership change takes, the more likely investors will be hesitant. She pointed out that President Yoon's unpopularity and a peaceful transition away from his leadership would help.

Despite opposition parties' vow to impeach him, Yoon survived an impeachment vote over the weekend after members of his ruling party walked out of parliament.

According to Jeff Ng, Head of Asia Macro Strategy at Sumitomo Mitsui Banking Corporation, the "Korea discount" is likely to continue until 2025 due to weak economic conditions, slower exports, and a weak Korean won.

"The likelihood of a swift resolution of domestic uncertainty leading to a return of investor confidence in the medium-term is uncertain at this stage."