Overview
It’s one of this year’s global stock market success stories. South Korean equities are emerging from decades in the shadow of a longstanding investor discount. Following in the footsteps of Japan, reforms of corporate governance have changed the way foreign capital sees the Seoul market. This month’s Investor’s Guide to Asia podcast investigates whether that surge in confidence is really justified, and what else needs to be done for it to continue.
For years, many Asian companies were criticised for hoarding cash on balance sheets and refusing to share profits with shareholders. But Korea is just the latest in a string of countries in the region where governments have confronted the issue with structural reforms that change the game.
Japan’s push for better corporate governance has been delivering solid outcomes since 2023, boosting dividend payouts and share buybacks. And Chinese and South Korean authorities have paid attention to the blueprint.
South Korea unveiled its ‘Value-Up’ programme early last year to reduce the so-called ‘Korea discount’. The drive has gained steam this year with a new president pushing for shareholder-friendly policies. Since June, parliament has twice amended the Commercial Act, which regulates public companies, and approved law changes that will help protect the rights of minority shareholders.
“All of these things, from a political or regulatory perspective, are moving in a good direction, and certainly have exceeded expectations,” says Fidelity International portfolio manager Jochen Breuer, who specialises in Asia and global dividend strategies and has added allocations to Korea this year. “We have seen companies adopting those value-up measures, and particularly some ex-government entities have seen significant improvement.”
Breuer says that the structural reforms have further to run yet. A third round of amendments to the Commercial Act is being pursued by the government and ruling party and is expected to mandate treasury share cancellations. A tax plan was also proposed to lower dividend income tax.
“It's early days, and some of those measures are still being rolled out,” says Breuer. “I'm hopeful that we will continue to see progress [in family-controlled conglomerates’ dividend payouts and share buybacks].”
China’s policy push
China’s market has been far more focused on straightforward growth plays this year. But the steps taken by regulators there have helped unlock demand from Chinese insurers, as the low bond yields available in China and the property downturn have made dividend-paying stocks relatively more attractive, according to Lynda Zhou, head of equity at Fidelity International’s China business. It’s estimated that Chinese insurers may have shuffled close to 1 trillion renminbi (USD $140 billion) into Hong Kong to buy high-yield stocks through the Stock Connect programme this year, she says.
As the authorities encouraged dividend payments and started linking the performance of managers at state-owned companies to return on equity, Chinese companies have rewarded more of their profits to shareholders. The average payout ratio – the percentage of company earnings paid out in dividends – increased to 39 per cent last year, compared to the average of 31 per cent over the past decade.
“On one hand, we’ve got a very strong tech rally,” says Zhou. “On the other hand, we have strong buyers from insurance focusing on dividend income. On both sides, we have pretty strong demand.”
“The icing on the cake”
By putting the market on a better regulatory footing, authorities are laying the groundwork for the long term. Breuer, who invests in strategies that look both globally and regionally, is currently overweight Europe and Asia and underweight the US, because he says that’s where he’s finding more companies with solid fundamentals and attractive valuations.
Over the past two decades, Asia’s high-dividend index has outperformed the standard index with lower volatility, he adds.
From the perspective of both Asian and global portfolios, Breuer sees opportunities in China.
“There are a lot of strong companies,” he says. “On top of that, you have improvements in shareholder returns, which are really the icing on the cake for the companies.”
