Seoul: South Korean stocks are undervalued compared with those of other advanced economies, an analysis from a local think tank showed Friday. The average equity risk premium (ERP) of South Korea's stock market is at 8.7 percent, 1.3 percentage points higher than the average ERP of stock markets in developed countries, according to a calculation from the Korea Capital Market Institute (KCMI) introduced during a forum held in Seoul.
According to Yonhap News Agency, the forum was jointly hosted by the Korea Derivatives Association to discuss policy ideas to overcome the "Korea Discount," which refers to an undervaluation of local stocks. ERP represents the excess return investors expect from investing in the stock market over less risky assets like government bonds. A high ERP indicates that investors require a higher premium for holding stocks, suggesting that the current price is undervalued.
The KCMI also analyzed the average discount rate of South Korea's stock market from 2006 to 2024, comparing it with those of other countries using the benchmark stock index of each nation. The discount rate is used to determine the present value of future cash flows of an investment, where a high rate indicates higher perceived risk and potentially lower stock valuation.
The institute revealed that the average discount rate of South Korea's stock market over the cited period was 11.5 percent. This figure was higher than the average discount rate of stock markets in the Group of Seven (G7) countries, which stood at 8.8 percent, as well as the average rate of stock markets in emerging economies at 10.9 percent.