Learning from New York and Tokyo bourses

U.S. and Japanese stocks are on a roll. The Dow Jones Industrial Average and Standard & Poor’s 500 Index have been breaching historic highs. Japan’s Nikkei Stock Average hit a 34-year high, going back to the economic bubble level of January 1990. But the Korean stock market points in the opposite direction. The main Kospi has lost nearly 7 percent so far this year.

The Chinese market is worse off. The H-shares, representing Chinese mainland companies listed in the Hong Kong Stock Exchange, lost more than 13 percent this year. Losses are piling up for Korean investors who had placed money in equities linked to H-shares.

If you take a look at the PBR — or the Price-to-Book Ratio, which is calculated by dividing the company’s current stock price per share by its book value per share (BVPS) — shows the extent of devaluation of Korean stocks. Korean stocks’ PBR averages merely 1.1 times, compared with Japan’s 1.4 times and U.S.’ 4.5 times. In other words, U.S. stocks have been outperforming their book value by four to five times greater and are going higher. On the other hand, Korean stocks performing on par with their book value are sinking.

What decouples Korean and U.S. stocks against common headwinds such as the Middle East geopolitical risk owes largely to frenzied expectations on tech companies riding on the AI drive. Magnificent Seven stocks referring to tech giants such as Microsoft, Meta Platforms, Amazon, Alphabet, Nvidia, Tesla, and Apple have been flying on AI power. Investors pin high hopes on innovation-driven U.S. stocks and tech companies. Japanese stocks have benefited from the low yen and increased corporate profitability backed by share-friendly measures such as stock buybacks.

The government is doing all it can through the ban on short selling and tax benefits on capital gains and individual savings accounts (ISA). But the incentives are not strong enough to boost stocks, as what matters to investors most are future fundamentals and prospects. Companies and their stocks can only blossom under business-friendly environments and technology initiatives promising a better future. The government has lifted the obligatory weekend shutdown for big grocery chains. Regulations that inconvenience consumers and constrain business activities must be removed. The government must provide incentives for long-term stock investment and encourage initial public offerings to feed market demand.

The Fair Trade Commission must examine whether its new legislation aimed to ensure fair competition among platform service providers may hinder innovation-led economic growth. The proposed act regulating big platform names like Naver and Kakao by identifying them as dominant players could constrain their future businesses in Korea. The country must move toward an innovation-friendly destination in order to combat discount on Korean shares.