By Anna J. Park
Korea and Taiwan have a very similar economic structure with both economies relying heavily on exports of IT products but the two countries have shown divergent paths in stock markets over recent years.
Analysts say that the key reasons for the difference were Korea's sluggish performance of non-IT, domestic-focused industries and Korean firms' low dividend payout policies.
Both countries have strong IT sectors, which largely contribute to their export-oriented economies. The largest companies in both economies in terms of market capitalization ― Samsung in Korea and TSMC in Taiwan ― take up over 30 percent of each of their total stock markets.
Despite their shared similarities in macroeconomics, performances of their stock markets are very different.
When comparing their key indexes ― Korea's KOSPI index and Taiwan's TAIEX index, KOSPI increased about 15 percent to Jan. 10 this year from Jan. 8, 2016, while TAIEX saw a more-than 52 percent jump during the same period.
In 2019 alone, the KOSPI rose only about 7 percent, well below TAIEX's 23 percent growth.
The difference has been partially driven by foreign investors' strong purchase of Taiwan's stocks. Foreign net purchase of Taiwanese stocks during the latter half of last year stood at some $6.5 billion, which is in stark contrast to the fact that they sold about $4 billion of Korean stocks during the same period.
Min Byung-kyu, global market analyst at Yuanta Securities Korea, also explains that Korea's overall stagnant performance of domestic industries is one of the main causes of the difference.
He pointed out that last year's performances by IT sectors in both countries were similar; market returns of the IT sector in Korea stood at 41.3 percent, while Taiwan's IT sector logged similar returns of 41.8 percent.
"The major difference came from poor performance in Korea's domestic industries, such as retail, electronics, communication, construction material, gas and finance and banking," Analyst Min told The Korea Times.
"Also, Taiwan's IT sector takes up a larger proportion in their stock markets than us. Their IT sector constituted about 62.7 percent of the total stock market at the end of last year, while Korea's IT sector possessed some 44.3 percent. Thus the Taiwanese stock market was positively influenced by overall brisk performances of global IT sectors, much more than the Korean stocks," Min added.
Another essential reason behind their divergent path in stock performances is different dividend rates, analysts say.
Taiwanese firms have a much higher propensity to pay dividends back to investors than Korean firms in general. The Taiwanese stocks offer one of the highest dividend yields to investors of about four percent, which is among the highest in global standards. Korean stocks' dividend rate stood at about two percent.
"Dividend policy is another key reason that explains the difference in the Korean and Taiwanese stock market performances. Dividend policy directly affects stock valuation. Korea's dividend propensity has increased over the years, yet it stills stands at some two percent in terms of dividend yield," said Shin Joong-ho, strategist at eBest Investment Securities.
He also explained Korea's particular sociocultural backgrounds is another reason for the low valuation of the stocks.
"Korean firms now have enough capital, yet they do not invest much nor pay dividends back to investors, which causes a low valuation of their stock prices. It seems that many firms still suffer from a sort of path-dependent trauma, due to their past experiences of harsh economic crises back in the late 90s and late 2000s. They tend not to hastily remove their cash and keep it for emergencies," he said.
He added that he expects Korean stocks will eventually go in the direction of rewarding more cash back to investors as the firms will be, more and more, pressured to be adaptive to investors' demands.