Lack of new growth companies holds back South Korea’s stock market

The South Korean stock market continues to lag behind other emerging economies, such as China, India, and Taiwan, largely due to a lack of globally attractive companies that can capture the attention of international investors. For over two decades, South Korea has heavily relied on major corporations like Samsung Electronics and Hyundai Motor. However, the country has struggled to cultivate a second or third generation of global growth companies. Samsung Electronics’ prolonged dominance has made the South Korean economy particularly vulnerable. Whenever concerns about the semiconductor industry arise, the entire domestic stock market, along with the broader economy, tends to feel the impact.

A view of Samsung Electronics' Seocho office building and the surrounding Seocho-dong area, seen from a rooftop bar in Nonhyeon-dong, Gangnam District, Seoul, on the morning of Sept. 23, 2024./Chang Lian-cherng

As of Sept. 23, Samsung Electronics, South Korea’s leading semiconductor stock by market capitalization, has seen its share price drop roughly 21% this year, according to the Korea Exchange. Foreign investors have been selling off the stock in the KOSPI market, driven by poor earnings forecasts. From the start of this month through the 20th, foreign investors sold a net 5.92 trillion won worth of Samsung shares. The company’s third-quarter earnings (July to September) are expected to fall short of estimates due to weak demand for smartphones and PCs. As a result, 10 domestic securities firms have already lowered their target price for Samsung by 10% to 26% this month alone.

A broader structural shift in the MSCI Emerging Markets Index over the past 20 years has also made South Korea less appealing to foreign investors. In 2004, South Korean stocks accounted for 18.67% of the MSCI index, but that figure has now dropped to 11.67%. Meanwhile, the share of the index represented by the information technology sector has grown from 16.69% to 24.24%. However, domestic tech giants like Kakao and Naver, which could have helped offset Samsung’s struggles, are facing stagnation due to management challenges and a lack of new business initiatives.

In contrast, Taiwan and India have seen new leading companies emerge, reinvigorating their economies. Taiwan’s economic growth shifted from Foxconn, Apple’s largest contract manufacturer, to TSMC, a leading artificial intelligence (AI) semiconductor foundry, following the COVID-19 pandemic. At its peak, Foxconn accounted for 22% of Taiwan’s GDP, but TSMC has since taken its place. This year alone, TSMC’s stock has surged by about 23%, propelling Taiwan’s stock market upward.

The shift from Foxconn to TSMC has also reduced Taiwan’s reliance on China, bolstering its economic resilience. Taiwan has been proactive in nurturing innovation. According to Wang Shu-feng, a professor at Ajou University and expert on Taiwan, the country’s corporate tax rate (20%) is lower than South Korea’s (24%), with additional tax exemptions further reducing the effective tax rate. He also noted that Taiwan imposes fewer regulations on advanced industries like TSMC, allowing them to flourish.

Meanwhile, India, with a larger population than China and a robust domestic market, is seeing rapid growth in sectors like retail and finance. Hyun Dong-sik, head of overseas business at Korea Investment Management, pointed out that India’s “Make in India” initiative, modeled after China’s growth strategy, has positioned the country to potentially replicate China’s success. He added that new companies in construction, finance, and other industries are likely to emerge in the future.

India’s strong domestic market has also boosted the stock prices of major firms such as Reliance Industries, an oil and telecommunications giant, and Tata Consultancy Services, a part of the Tata Group. Shares of these companies have risen by about 13% and 12%, respectively, this year. India’s stock market dynamism is further highlighted by ICICI Bank, the nation’s largest bank, rising to fourth place in market capitalization. Other banks and financial firms have also entered the top 10, contributing to the market’s vibrancy.