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SOUTH KOREA: An Introduction to Capital Markets

The Pandemic New Normal in Korean Capital Markets 

Contributed by Haeng-Gyu Lee, Jipyong LLC.

If we look back to the situation of the Korean capital markets early this year before the COVID-19 pandemic, it was already facing uncertainty due to various factors, including the US-China trade war, the Korea-Japan trade dispute and the ongoing nuclear threat from North Korea. Small and medium sized Korean companies with a competitive advantage in the materials, parts and equipment sectors has been put in the spotlight for an initial public offering (IPO) in Korea, but almost every IPO transaction was suddenly put on hold due to the COVID-19 pandemic, as in most other countries.

Several months had passed without any significant movement and it was not until the successful IPO of SK Biopharmaceuticals on May 19, 2020 which acted as a catalyst for revitalising the capital markets in Korea. With the continuing spread of COVID-19, the IPO of SK Biopharmaceuticals set up a 'new normal' in capital markets in not just Korea, but also the United States. All public offering documents were provided in electronic form and all the deal road shows and investor education programmes were performed virtually or by the so-called untact method, which market participants may not have been entirely familiar with. The competitive valuation of offered shares of SK Biopharmaceuticals, which was lower than the market expectation at the time, also drew attention from various domestic institutional investors as well as international investors. In particular, Korean individual investors, so-called “Dong-Hak-Gae-Mi” meaning ant warriors, showed tremendous interest in the participation in the public offering of SK Biopharmaceuticals. The low interest rate under the current pandemic and the real estate regulation which became stricter under President Moon’s government were contributing factors for moving money into the equity capital market in Korea, especially towards IPOs.

The success of SK Biopharmaceuticals’ IPO dramatically dispelled the concerns of the market participants and cleared up uncertainty in the capital markets under the pandemic, and changed the entire mood surrounding investment in the equity market. Gaming companies, such as Kakao Games and Me2Zen, which were actually performing better under the untact environment from the pandemic, also completed their IPOs on the KOSDAQ Market. Numerous bio-pharmaceutical companies from domestic and overseas such as Korea Pharma, Gencurix, Aptamer Science, Somazen, NGen Bio, Kobiolabs and Prestige Biopharma have either successfully completed their IPOs or are currently in the process of public offerings. The IPO of Big Hit Entertainment, the management agency of K-pop superstar BTS, had also drawn diverse attention from various types of investors including BTS fans, ARMY. Several AI and big data-related companies such as VAIV, Saltlux and WiseItech have also successfully completed their debuts on the capital markets.

In order to keep up with the bullish market, the National Assembly of Korea and the Korean Government ultimately decided to abandon the new tax regulation which was supposed to impose capital gains tax on any shareholder who holds 300 million Korean won of shares of a certain listed company from 2021. In addition, the Korean regulatory authorities are considering the adoption of the requirement to increase the portion of mandatory allotment of publicly offered shares to the individual investors from 20 per cent to 30 per cent of the total public offered shares. Thanks to the upcoming by-elections of the mayors of Seoul and Busan in April 2021 and the presidential election in March 2022, politicians are trying to ingratiate themselves with the millions of individual investors, which is another local element that may contribute favourably towards boosting the capital markets outlook in Korea.

In the past, the individual investors in Korea, like typical individual investors in other countries, were generally not successful in their investment in the equity market compared to institutional and foreign investors. But many of the current generation of the Korean individual investors, “Dong-Hak-Gae-Mi,” have shown a pattern which is different from the past individual investors, based on their experience and lessons from the IMF crisis in 1997 and the financial crisis in 2008. They tend to study the global economic conditions and gather market data and information from various sources including social media before making their investment decisions. According to the Korean Financial Investment Association, the number of the active securities trading accounts of Korean investors increased up to 32,172,683 as of July 2020 from 29,362,933 as of January 2020 - bearing in mind that the total population of Korea is no more than 52 million. We call these self-educated and sophisticated individual investors “Smart Ants.” They have invested billions of US dollars into electric car makers, big-techs and platform companies such as Tesla, Google, Amazon and Apple in the US markets, and to trade their securities, Korean individual investors also use various free apps provided by the securities brokerage firms, like Robinhood, a free securities trading app developed by Vladimir Tenev and Baiju Bhatt. Moreover, the emergence of fintech based brokerage firms such as Kakao Securities and Toss Securities is expected to cause the so-called ‘Catfish Effect’ on the traditional brokerage markets.

From a global perspective, many market participants would agree that there are uncertainties in the capital markets in the year ahead. The transition of presidential power in the US would be one of the determining factors for the prospects of the global capital markets. Another key factor would be the COVID-19 pandemic. Pfizer and Moderna recently announced positive news about the potential vaccine, but most of the world is still currently faced with continuous waves of COVID-19 and we may not be able to put away our face masks until the end of next year. Korean capital markets, however, will overcome such market uncertainty as it did in the second half of this year. In particular, K-battery, K-bio and K-semiconductor industries will lead the Korean markets, which hopefully may have a positive effect on the global markets as a whole. In dealing with the uncertainties ahead, we may also come across another 'new normal' as we saw from the emergence of the group of individual investors in the Korean capital markets, despite COVID-19.