For Structural Reasons

KOSPI’s price-to-book ratio (PBR) has remained below 1 since June 2018. Experts ascribe this to structural reasons, such as government regulations and a decline in industrial competitiveness, rather than stock market undervaluation.

According to financial data provider FnGuide, KOSPI’s 12-month leading PBR was 0.75 on May 14, continuing to remain below 1 after June 13, 2018. For reference, it dropped to 0.59 on March 23 this year in the wake of the COVID-19 pandemic and had been around 0.7 during the 2008 global financial crisis.

Economists point out that this has to do with South Korea’s industrial structure. The PBR is closely related to the return on equity (ROE). The ROE indicates a company’s net profit derived from its capital. In other words, it is a capital productivity indicator.

In the South Korean stock market, traditional economic sectors such as shipbuilding, steel, insurance and machinery constitute a larger part than the new industries of IT platform companies and the like, which means the ROE cannot but be low structurally. Besides, the ROE and the PBR of large manufacturers are on the decline as China has emerged and their heyday is gone.

The same trend is witnessed in the financial and utility industries as well. For instance, the current PBRs of Shinhan Financial Group, Korea Electric Power Corporation and Samsung Life Insurance are 0.33, 0.22 and 0.23, respectively.

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