Preferred shares, which lagged far behind common stock during the first-half rally, are closing the price gap as the market pulls back. Common shares, which had drawn heavy inflows on growth expectations, have given back more of their gains, narrowing the discount on large-cap preferred shares and shrinking the reverse premium on some of them. Analysts say preferred shares have grown more attractive as they keep pace with common stock, alongside expectations of stronger shareholder returns.
The discount on Samsung Electronics preferred shares (005935) relative to its common stock stood at 24.8%, according to the Korea Exchange on the 11th. That was down 11.8 percentage points from 36.6% on June 22, when Samsung Electronics topped 350,000 won, falling below even the year-end level of 25.6%. The discount is the price gap between common and preferred shares divided by the common share price; the higher the figure, the deeper the discount on the preferred shares.
Other large-cap preferred shares showed a similar pattern. The discount between Hyundai Motor and its Hyundai Motor 2nd preferred B shares — whose common stock had approached 800,000 won on hopes for physical artificial intelligence (AI) — narrowed by 9.0 percentage points over the same period, from 59.5% to 50.5%. Brokerage stocks that had benefited from a buoyant market and rising trading volumes, such as NH Investment & Securities preferred (22.6% to 12.3%) and Korea Investment Holdings preferred (29.6% to 22.6%), also narrowed their discounts, as did Hanwha 3rd preferred B (66.8% to 65.1%) and LG Electronics preferred (66.6% to 63.1%).
The narrowing discounts are seen as the result of a larger pullback in common shares during the correction. In the rally, investor sentiment had concentrated in stocks with strong growth expectations, such as semiconductors and robotics, but as volatility rose, common shares that had priced in those hopes fell more sharply, shrinking the price gap. Preferred shares, which carry no voting rights but come at a lower price and offer priority in dividends, can stand out for their relative price appeal in a market pullback.
The reverse premium is also shrinking quickly among low-liquidity preferred shares that had traded above their common stock. The reverse premium on Tongyang 2nd preferred B (001527) fell by 712.7 percentage points, from 1,170.4% to 457.7%, while Jinheung Enterprise 2nd preferred B (002787) (740.6% to 237.4%), Kkdur Nara preferred (004545) (587.2% to 275.4%) and Seoul Food preferred (004415) (642.2% to 356.9%) also sharply narrowed their gaps. Daewon Cable preferred saw its 24.7% reverse premium disappear over the same period and now trades 27.8% below its common stock. The reverse premium is unwinding mainly in stocks with small floats, whose prices swing sharply on shifts in supply and demand.
Still, the price appeal has yet to translate into actual buying of preferred shares, analysts say. This month, retail investors net-bought Samsung Electronics to the tune of 4.68 trillion won ($3.4 billion) but picked up only 194.1 billion won of Samsung Electronics preferred shares. That marked a shift to net buying from 773 billion won in net selling the previous month, but it was equal to just 4.1% of their net buying of the common stock. Retail investors also net-sold 69.8 billion won of Hyundai Motor, 10.5 billion won of Hyundai Motor 2nd preferred B (005387) and 3.6 billion won of Hyundai Motor 3rd preferred B.
In the brokerage community, some argue that the recent narrowing of discounts may go beyond a simple stock correction and lead to investment in preferred shares, driven by regulatory changes and stronger shareholder returns. “If the voting-rights premium is ‘insurance against controlling-shareholder risk,’ the revised Commercial Act has grown large enough to replace that insurance,” said Kim Soo-hyun, head of the research center at DS Investment & Securities. “With aggressive, large-scale shareholder returns expected, funds betting on preferred shares in the second half could also increase.”
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