Under the Macroscope: South Korea—from ‘discount’ to ‘re-rating’—but only if policy becomes behaviour

South Korea is a market that can look ‘fully priced’ in a headline rally and still be structurally undervalued in the fine print. Its equity market benchmark index, the KOSPI, surged in 2025 and saw a strong start to 2026, forcing global investors to re-engage. Two very tangible engines have driven this re-engagement: Korea’s centrality to the artificial intelligence (AI) memory supply chain and a defence export cycle that is becoming economically meaningful. But the debate that ultimately determines whether Korea earns a durable valuation re-rating is neither AI nor geopolitics. In our view, it is governance, capital efficiency and whether reforms finally address the roots of the ‘Korea Discount’ rather than its symptoms.

Policy assessment: directionally positive, but markets will price execution, not headlines

The shareholder-friendly return agenda under the administration of President Lee Jae-Myung is directionally constructive because it explicitly targets corporate behaviour, not just investor sentiment. Mandatory cancellation of treasury shares, coupled with separate taxation on dividend income, has the potential to improve capital efficiency and make payouts more attractive at the margin.

The key risk we see is timing and credibility. Even a lower top rate on dividend taxation (signalled down toward 25% in the latest direction) will not meaningfully change payout decisions until reforms are final, legislated and implemented with a clear effective date. Companies rarely rewrite capital policy on draft proposals. If the legal architecture only becomes binding from 2026, then the observable corporate response is much more likely to become evident in the second half of 2026, when boards can act with certainty rather than optionality.

Encouragingly, Korea has already shown that ‘soft’ reform signals can produce ‘hard’ outcomes when incentives align. Top KOSPI companies have begun cancelling sizeable volumes of treasury shares, reflecting both anticipation of tighter rules and a willingness to position ahead of the regulatory curve. This matches the broader pattern we highlighted previously: Shareholder value is often as much about culture as regulation, and voluntary momentum can build once the ‘direction of travel’ is accepted.

However, resistance from business lobbies on governance-related revisions to the Commercial Act is a reminder that Korea’s reform path is not linear. That matters, because markets will not permanently close the discount on the basis of policy intent alone. They will re-rate Korea when policy translates into repeatable corporate actions: higher dividends, credible buyback programmes, more frequent cancellations of treasury shares, and cleaner governance standards that reduce the ‘control-premium’ tax investors embed in valuations.

The Korea Discount: shrinking, not disappearing

Korea’s structural discount has clearly narrowed, but it has not gone away. In our more recent work, we framed this as ‘Value Up catching fire, slowly’ and pointed to measurable progress: stronger activism, rising buybacks and dividends, and an improving valuation gap versus emerging market peers.

The crucial point is that a re-rating is not one event; it is a sequence:

1. Earnings must keep delivering.
   Valuations ultimately anchor to sustainable profitability. Korea’s re-rating case is strengthened by its exposure to the global AI capex cycle and its dominance in critical memory technologies. Korea’s role in High Bandwidth Memory (HBM) is particularly strategic, with Korea commanding a very large share of that market, and a spillover into broader Dynamic Random Access Memory (DRAM) tightness as AI systems drive non-linear increases in memory content.
2. Capital allocation needs to become systematic, not episodic.
   A durable re-rating requires companies to adopt clear, consistent payout frameworks and treat surplus cash as a balance-sheet liability rather than a comfort blanket. The market is watching for standardisation: explicit payout targets, multiyear buyback plans and routine cancellation of repurchased shares rather than indefinite warehousing.
3. Minority shareholder protections must strengthen, and market ‘plumbing’ must improve.
   Korea’s discount has long reflected governance frictions: chaebol complexity, uncertainty around related-party transactions, spin-offs, affiliate mergers & acquisitions and uneven treatment of minority shareholders. Earlier analysis highlighted the core problem set: governance, dividend uncertainty, shareholder return policies and a risk premium that investors apply almost by default.
4. Policy stability matters as much as policy ambition.
   Global investors need confidence that reforms survive political cycles. If reforms are perceived as short-term market support, the ‘headline premium’ tends to fade quickly. If reforms are embedded and enforced, the risk premium tends to compress, and the market can generally sustain higher multiples.
    

Foreign exchange (FX) and flows: Volatility likely, but KRW weakness is not automatically a deal-breaker

A prolonged period of elevated US-dollar/Korean won (USD/KRW) has mattered for returns, especially for USD-based investors, but it is not necessarily a reason to exit Korea, in our view. In this cycle, KRW weakness has been as much a valuation and competitiveness tailwind for exporters as it has been a translation risk for foreign holders. If US interest-rate differentials narrow into 2026 and domestic policy reduces FX volatility, the currency can become less of a structural headwind.

Meanwhile, the flow picture is not purely foreign-driven. Domestic institutional allocation decisions and retail behaviour can materially influence the marginal bid for Korean equities. The most important point for global allocators is that earnings delivery in its market anchors still dominates Korea’s equity case, particularly for semiconductors, where strong fundamentals can outweigh currency noise.

Bottom line

The Lee administration’s shareholder-return measures have a credible path to improving capital efficiency, but the market will likely not ‘award’ Korea a permanent re-rating until reforms become observable corporate behaviour. Korea’s discount is narrowing because investors can already see the ingredients: a globally relevant earnings engine through AI memory, a defence export cycle with real scale, and a governance narrative that has finally moved from discussion to first steps.

The next phase is about endurance. If policy stability holds and corporates institutionalise shareholder returns and governance improvements through 2026 and beyond, Korea can continue migrating from ‘structurally discounted’ to ‘structurally re-rated.’ If not, the risk is that reforms function as short-term market catalysts that fade as soon as political attention moves on. We are encouraged by what we are seeing so far.