What would you traditionally think of when it comes to Korean equities? For me it is a value-driven market with low valuations courtesy of the ‘Korean discount’ caused by weak governance, opacity and poor shareholder returns. But things have been changing in this often scoffed at emerging market.
At the back end of January, the South Korean (KOSPI) index broke through the 5,000 barrier for the first time. The index has been on a tear, returning 80% in the past 12 months, compared with 31% for MSCI Emerging Markets as a whole.
Those low valuations have also been tackled to a degree. The market is trading at a price-to-earnings (P/E) ratio of 24.7x, which is higher than its three-year average P/E of 18.5x – that’s despite earnings remaining mostly flat over this time.
Rationale for the renaissance can be attributed to a number of factors, but two clear ones stand out and, interestingly, they are at polar opposite ends of the market; diversification gives investors optimism that further growth may follow.
The first of these is the role of Korea as a hub (alongside Taiwan) for semiconductor and hardware component production, both of which are integral to the artificial intelligence (AI) boom. Korea specialises in the dynamic random-access memory (DRAM) market.
High Bandwidth Memory (HBM) chips, one of the most advanced types of DRAM, is now essential to the rollout of AI infrastructure, with SK Hynix and Samsung Electronics leading the market in terms of technology and scale.
Matthews Asia portfolio manager Sojung Park said that as the graphics processing unit (GPU) chips of Nvidia, the market leader in GPUs for AI, advance, they require much more bandwidth and capacity from HBM chips.
She said: “Amid the structural supply shortage in the HBM market, together with its growing strategic importance to global AI buildout, Korean companies in the field are seeing more opportunities to establish customer loyalty, longer-term contracts and greater pricing power.
“The memory sector has traditionally been highly cyclical and we still expect expansion and contraction in the area. However, over the long term, we believe Korea’s advanced memory chip makers will further build and expand on their solid market positions.”
This growthier play is being supported at the other end of the market by the ‘Value-Up Program’, a move by the Korean government to fix the aforementioned Korea discount – which reflects those historically low valuations despite strong fundamentals.
The government-led reform was introduced in 2024 to improve corporate governance, encourage shareholder returns and generally make Korean companies more transparent and, ultimately, investor-friendly.
Unlike Japan, where corporate governance changes have been enforced, Korea’s implementation has been a voluntary initiative thus far to encourage listed companies to independently create and disclose plans to improve their corporate value and shareholder returns.
JPMorgan Emerging Markets Growth & Income investment specialist Emily Whiting said while the rationale behind these corporate governance changes in Japan was due to cross-shareholdings, Korea’s motivation is tied up in family ownership (chaebols). At this stage it is heavily focused on areas such as the banks.
She said: “If you went back to Covid, I would have laughed about owning Korean banks, but we now own three of them. A good example is Hana Financial; in 2017 buybacks and dividends combined accounted for total shareholder returns of 16% – they are now in the mid-forties – a threefold increase.
“The P/B [price-to-book] is still 0.7x, despite a 50% share price increase last year, and dividends yield 3%. These aren’t set-the-world-on-fire stocks – but it shows that if you have management that is engaged and understands what signals to send the market (and you have got a company with financial strength) it can deliver an excellent, steady and compoundable exposure,” she adds.
Aberdeen Asian Income fund manager Isaac Thong has moved his portfolio from underweight to neutral in Korea, adding a bank and two insurance companies.
He said: “The banks are embracing change at the fastest rate. We own Shinhan, but if you look at the three big banks – their dividend pay-out ratio three years ago was about 25%. Today it is 45% and in the next year it will be over 50%. They are demonstrating progressiveness to shareholders, and we think they can do more.
“Insurers will follow. We invest in Samsung Fire and Marine, who are the leading insurer in Korea with a great track record of writing protection products. The family-owned nature of businesses in Korea means the corporate change could take longer than it has in Japan.”
However, ING believes some risks are appearing within the economy, pointing to a K-shaped recovery, which remains heavily reliant on robust semiconductor demand. They cite improvement in manufacturing being offset by deterioration in non-manufacturing sectors (particularly those that are domestically orientated, as domestic demand may slow as the impact of fiscal stimulus wanes).
M&G Global Emerging Markets manager Michael Bourke has recently moved from overweight to partially underweight the region, pointing to profit-taking rather than a top-down call on Korea or a negative macro view.
He said: “Korean equities delivered a very strong run through 2025, driven largely by the AI cycle and semiconductor exposure. After this rally, upside seems, in our view, more limited and risks are more balanced, which prompted us to lock in gains.
“Benchmark context also matters when discussing Korea. It is now one of four countries (alongside China, India and Taiwan) that dominate the MSCI EM Index. As the benchmark has become increasingly concentrated, we are comfortable diverging where bottom-up opportunities are less compelling.”
Despite the strong returns already seen, there is plenty of optimism around the market. Importantly, it is a diverse play, with investors not just tied to AI-memory as the Value-Up Program offers an alternative stable returns play in the market.
Those wanting exposure might consider the likes of Invesco Global Emerging Markets fund, which has 15% in the country, while those looking specifically for a dividend approach might look to the Jupiter Asian Income fund, which holds 10%.
Darius McDermott is managing director of FundCalibre. The views expressed above should not be taken as investment advice.