Preferred Stock Index Outpaces KOSPI, but Low Liquidity Risks Persist

Korea's KOSPI preferred stock index posted higher returns than the main KOSPI index in the second half of this year. Expectations for preferred stocks, which have been trading at a relative discount, are rising as discussions on the Commercial Act revision including mandatory treasury stock cancellation and separate taxation of dividend income gain momentum. However, low liquidity remains a key risk.

According to the Korea Exchange, the KOSPI preferred stock index rose 22% in the fourth quarter (October 1 to December 12), surpassing the KOSPI index return of 21%. This marks a trend reversal, considering that the preferred stock index gained 20% in the first half, lagging the KOSPI's 28% by approximately 8 percentage points.

Market observers attribute the gains to expectations that the Commercial Act revision will improve the shareholder return environment, with the effects now being reflected in preferred stocks. Under the third Commercial Act revision bill, companies must cancel newly acquired treasury shares as well as existing treasury stock holdings within one year. As a plan to introduce separate taxation on dividend income for high-dividend companies enters the final stages, preferred stocks—which lack voting rights but have priority in dividends—are gaining greater investment appeal.

The price gap between preferred and common shares remains wide. The discount rates for major preferred stocks such as Samsung Electronics Preferred (005935.KS), Hyundai Motor 2nd Preferred B (005387.KS), and LG Chem Preferred (051915.KS) have actually widened since the beginning of the year. However, growing dividend appeal and shareholder return expectations appear to have led investors to view the persistent undervaluation of preferred stocks as an opportunity for discount narrowing.

Investors uncomfortable with individual stock selection are turning to preferred stock exchange-traded funds. TIGER Preferred Stock, a representative preferred stock ETF listed on the domestic market, tracks the KOSPI preferred stock index and comprises blue-chip preferred stocks with strong market capitalization, liquidity, and dividend track records. The product has gained 78.13% year-to-date, outperforming the KOSPI index at 73.67% over the same period. "Companies with stronger incentives for reputation management and governance improvement will likely see discounts narrow for both common and preferred shares," said Lee Kyung-yeon, a researcher at Daishin Securities.

However, concerns about liquidity risks in preferred stocks persist. Of 22 ultra-low liquidity stocks as of this month, 20 were preferred shares. All 17 stocks classified as having "insufficient listed shares" with fewer than 200,000 shares outstanding were also preferred stocks. Under current regulations, stocks that fail to meet these requirements for two consecutive half-year periods enter delisting procedures. According to the exchange, 24 low-liquidity stocks (combined KOSPI and KOSDAQ) will be subject to single-price trading for one year starting next year due to infrequent trading, up five from this year. Of these, 22 are preferred stocks, accounting for 92% of the total.