Lots of people have started to consider the Korean equity market recently due to the fact that this country has become one of the largest stock markets worldwide.
It is such an interesting thing to know the reasons why people are interested in investing in Korea. It might give you an opportunity to invest in Korea as well.
The Reasons behind the Popularity of Korea Equity Market
There are several reasons that contribute to the popularity of the Korean stock market that even Warren Buffet makes it the first foreign market he invests in beyond the US.
- Korea Belongs to the Cheapest Market
Nowadays, Korea is still considered to be the cheapest market among major markets worldwide.
The reason behind this condition is actually because the equity market in this country is controlled by the Chaebol families. They care much about self-interests rather than the shareholders.
This makes global investors avoid such ignorance for corporate domination so that they don’t get affected by the Chaebol impacts.
As a result, the people’s demand for Korean equity is low which contributes to the low valuation for those companies.
People often refer to this phenomenon as a Korean discount. The impacts of Chaebol corporate domination in the equity market can be seen obviously in the majority of company characteristics in Korea.
This becomes one of the important considerations when potential investors are doing market research in Korea.
- Korean Companies Frequently Have Low Margins
Korean companies tend to have low margins due to the prolonged investments during the loss-making side business for a long period.
Mostly, those families commit themselves excessively to a long-term project that is expected to bring better achievements in the future for the companies.
Yet, they face a problem when the investment areas are not absolutely associated with the core business they run.
Thus, they don’t receive any advantages from the networks with the main companies. It turns to be worse when there are too many egos in the families with failing investments.
- Korean Companies Prefer to Reserve Much Cash
Korean companies frequently save much cash to manage the balance as Chaebol families don’t have lots of incentives to hand it out to the shareholders.
Chaebols don’t prefer to sell the shares. Instead, they care more to keep controlling the companies while having stable access to cash through dividends or finances.
They like to use cash on their own rather than share it to raise the stock prices. However, this condition often causes bad acquisitions since chaebols pay more attention to creating big deals instead of understanding their egos or managing their control.
The result of this condition is Korean companies abstain from using debt to maximize their balance sheets.
They might learn from the companies’ loss of control during the emergency time such as what happened during the Asia crisis back in 1998.
By knowing the real conditions of the Korean equity market, you know the reasons behind the high interests of people at the present to invest in the Korean market.
These main reasons help you to consider whether Korea is the right market for you to make an investment for better profits or not.