The Korea Value-Up Index is a stock index that weights the free-float market capitalization of 100 domestic listed companies with outstanding profitability and shareholder returns. The Korean stock market has long carried the label of the ‘Korea Discount,’ a structural undervaluation phenomenon in which stock prices are formed lower than warranted by corporate earnings, with low shareholder return rates and opaque governance cited as the main causes. There is a precedent in which the Tokyo Stock Exchange succeeded in revaluing the Japanese stock market in 2023 by demanding improvement in the Price Book-value Ratio (PBR). Subsequently, the Financial Services Commission and the Korea Exchange launched the Corporate Value-Up Program in early 2024.
On September 24, 2024, the Korea Exchange officially announced the constituent stocks and selection criteria for the Korea Value-Up Index, and began providing real-time index data on September 30 of the same year. Stock selection passes through a five-stage screening process. First, companies meeting the basic requirements of ‘Market Representativeness’ — selecting those within the top 400 by market capitalization — and ‘Profitability’ — excluding companies in the red for two consecutive years — are filtered. Thereafter, ‘Shareholder Return’ screening selects companies with a history of dividends or share buybacks, followed by ‘Market Valuation’ selecting those with high PBR, and ‘Capital Efficiency’ selecting those with high Return on Equity (ROE). The final 100 stocks are selected through this phased evaluation.
[Korea Value-Up Index © ESG.ONL/ESG Today]
The base date of the Korea Value-Up Index is January 2, 2024, with the base index set at 1,000 points. The index constituents are regularly rebalanced every June. Unlike the conventional KOSPI 200, which selected 200 representative blue-chip stocks solely based on market capitalization size, the Value-Up Index was designed to avoid concentration in specific industries by introducing relative evaluation across industry groups. As a result, a diverse range of industries — including information technology, industrials, healthcare, and finance — are included in the Value-Up Index at a ratio of 67% from the KOSPI market and 33% from the KOSDAQ market.
Shortly after its launch, the Korea Value-Up Index also became embroiled in controversy over the validity of its composition. Opinions were raised questioning whether the stocks included in the Korea Value-Up Index actually met the key purpose of value-up — discovering companies with high shareholder returns and capital efficiency to induce market revaluation. It has also been pointed out that there is a disconnect between the original goal of enhancing shareholder value and the actual index composition, as more than half of the constituent stocks have dividend yields below 1.97%. For the Korea Value-Up Index to achieve its original goal of resolving the Korea Discount, it will need to pursue refinement of the index design while also managing the substantive establishment of corporate governance reform and a shareholder return culture.
by Editor O