Korean equity surge risks stuttering without stronger reform push: Raychaudhuri
The well-known 'Korea discount' afflicting the country's stocks has narrowed considerably this year. Korean equities typically trade at a sharp valuation discount to Asian stocks excluding Japan, with the exception of a brief period of AI-fuelled euphoria in 2023.
But this discount fell from around 40% at the peak of political upheaval last year to under 30% in mid-July, thanks largely to expectations of shareholder-friendly reforms and greater clarity around the shape of the new government.
However, Korean equities hit a hurdle in late July. The market corrected 4% in the last two trading days of the month after President Lee's government raised the peak corporate tax rate from 24% to 25% and the securities transaction tax from 0.15% to 0.20%.
The announcement of a Korea-U.S. trade deal removed some uncertainties, but ambiguities about execution remain, and, overall, disappointment regarding the tax tweak overshadowed the trade truce relief.
Korean equity performance in 2025 has been driven not just by political shifts but by several fundamental factors in a few large sectors.
Financials, which constitute 13% of Korea's equity market, appreciated by 57% in the year through July 25, benefitting from investors' preference for high dividend yields and expectations of increased loan growth after a stream of rate cuts by the Bank of Korea.
Meanwhile, industrials, representing 17% of Korea's market, have been lifted 54% over that period, thanks to the global defence and infrastructure spending boom.
Technology, the country's largest sector at almost 30% of the market, has seen share prices rise by 45% in this time. The flagship technology stocks Samsung and SK Hynix are up 24% and 55%, respectively, as they continue to be propelled by AI optimism and the success of some specific new products, most notably Hynix's High Bandwidth Memory chip, an essential input to advanced AI servers and Nvidia's GPUs.
Beyond these sector-specific catalysts, one of the most significant trends spurring investor enthusiasm for Korea this year has been the expectation of regulatory changes designed to protect minority shareholders.
Korea's 'Value Up' program, initiated in February 2024 by the country's previous government led by former President Yoon Suk Yeol, began to tackle key issues plaguing Korean corporate governance, but many investors believe it did not go far enough.
The unaddressed concerns include the prevalence of cross-holding structures that give founding families disproportionate control over companies and, relatedly, companies' reluctance to distribute excess cash to shareholders.
Former President Yoon's declaration of martial law in December 2024 and his subsequent impeachment led to presidential elections in June 2025, and the formation of a seemingly stable government under President Lee Jae Myung.
Soon after, on July 3, the National Assembly passed, opens new tab a corporate governance reform bill, which, among other things, requires company directors to act in the best interest of shareholders, limits large shareholders' voting rights when appointing audit committee members, mandates that hybrid virtual shareholder meetings must be held by publicly traded firms above a certain size, and raises the required proportion of independent directors on boards from one-quarter to one-third.
Even before these measures were taken, corporate behaviour was already changing in anticipation of government pressure. Korean dividend payouts have been rising since 2022, and so have buybacks, according to FactSet. Indeed, buybacks in the first half of 2025 are higher than in all of 2024.
These positive changes may have helped spur the rush of foreign capital flows into the country's equity market since April.
Foreign institutions sold a net $28 billion of Korean equities from August 2024 to April 2025, and bought back a net $6 billion over the next three months.
The currency has also been supportive of inflows. The Korean won has appreciated 7% against the U.S. dollar in 2025, second only to the Taiwanese dollar in the Asian leaderboard.
Valuations remain attractive in Korea's market despite the sharp rally. Korean equities trade at a forward price-to-earnings multiple of 12.3x, far lower than its Asian peers that have similar earnings growth profiles.
Of course, Korea's PE ratio is based on an 18% earnings growth forecast in 2026, the FactSet consensus expectation, and some investors may be sceptical about this figure. But such scepticism seems unjustified, as Korea's consensus EPS forecasts have been rising since March, a period marked by significant geopolitical and economic uncertainties that are, in many cases, now being resolved.
Can the Korean rally regain its momentum? While the market's response to the U.S.-Korea trade deal may not have been overly positive, the outcome – a 15% tariff for many Korean goods versus the 25% rate feared – removes a massive risk, given that 15% of Korean companies' aggregate revenue comes directly from the U.S., according to FactSet.
Investors, however, would be well-advised to keep an eye on the country's reform calendar, as several governance-enhancing reforms are still not finalized, most notably a tax amendment to incentivize higher dividend payouts.
Moving forward, the fate of the Korean equity rally could depend, to a large extent, on what happens in government.
(The views expressed here are those of Manishi Raychaudhuri, the founder and CEO of Emmer Capital Partners Ltd. and the former Head of Asia-Pacific Equity Research at BNP Paribas Securities).
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