Markets

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

It turns out the stock market isn't too worried about South Korea's corruption scandals.

Korea Rallies
Despite slowing GDP growth, Korean stocks have outpaced Japanese and world markets
Source: Bloomberg

A court ruling against the planned arrest of Samsung Electronics Co. heir apparent Jay Y. Lee on bribery charges linked to a political crisis revived decades-old pleas to rein in South Korea's chaebol, the web of family-controlled conglomerates that command as much as 80 percent of gross domestic product.

The thinking goes: Commit to more transparency, and companies could narrow the so-called Korea discount -- lower valuations compared with many of their global peers.

Undervalued?
The so-called Korea discount describes how South Korean companies trade at lower price-to-earnings multiples compared to global peers

Reform South Korea's weak corporate governance and international investors will pile in, according to economists and analysts. Yank the government's hands out of businesses like Samsung, SK Group, and the Hyundai and Lotte conglomerates, and tangible value can be unlocked, activist investors including Elliott Management Corp. argue.

Taking Charge
Korean and Japanese companies lag those in the U.S. and Singapore in corporate governance
Source: Bloomberg

Certainly, the chaebol must not be able to operate above the law. But the latest revelations are hardly scaring investors away: The MSCI Korea Index rose about 23 percent in the last 12 months, measured in dollar terms, compared with a 19 percent gain in the MSCI World Index and an almost 14 percent increase for the MSCI Japan Index on the same basis. So far this year, the Korea Index is up 5.3 percent, while the world and Japan gauges are up around 1 percent.

That performance amid political turmoil looks more robust still, considering that the economy is slowing: Growth in the fourth quarter was the least in more than a year, and consumer confidence is running near an eight-year low.

And U.S. President Donald Trump's protectionist plans, starting this week when he struck down the Trans-Pacific Partnership, don't bode well for an export-reliant country. 

But these are current concerns, and the stock market is looking ahead. 

As Credit Suisse analyst Sakthi Siva points out, some investors see bargains, as Japanese companies' price-to-book value is almost 50 percent higher than those in Korea. Meanwhile, the Korean Index's return on equity of 9.2 percent beats 8 percent for the Japan equivalent. Siva also reckons that consensus revisions for Korean companies this year are the best since 2010.

The 2.7 percent depreciation of the Korean won against the dollar since the U.S. election result also helps make the nation's exports more competitive.

As Gadfly's David Fickling has written, for all the sleaze among the chaebol, there's little evidence they are actually holding the country back.

Now the stock market is endorsing that view.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net