The MSCI Korea Index has consistently outperformed global markets. What is driving the continued rise of Korean stocks?

Alpha Call Episode 9 Livestream Recap | South Korean Stocks Up Over 150% Yet Still Undervalued—Has Revaluation Just Begun?

Guest:

Michael Yong-Haron, CFA | Founder and Executive Chairman of WinShan Investment Limited

Clarence Yeung | Executive Director of WinShine Investment Limited

Freya Sun, CFA/FRM | Senior Sector Analyst, Institutional and Private Wealth Team, Futu

Segment 1: Why South Korean Equities Have Consistently Led Global Markets (00:00:14 ~ 00:09:00)

MSCI Korea posted a 92.4% gain in 2025 and rose another 66.5% in the first four months of 2026, making it the best-performing major market globally. Nearly 70% of companies in the KOSPI index trade below 1x price-to-book (PB).This undervaluation has persisted for over a decade.South Korea covers only 40% of the UK's land area yet ranks as the world’s 10th-largest economy by GDP, with a per capita GDP of approximately USD 55,000—making it an undervalued mature economy.

Segment 2: Valuation Re-rating Potential—Still Cheap Even After a 150% Rally (00:09:00 ~ 00:11:40)

Even after such a substantial rally,South Korean equities still trade at a significant discount relative to global markets, indicating prices have not fully reflected improving fundamentals.。

- PE ratio: Only 9.5x as of end-2025 (compared to the U.S. and India, which trade at much higher PEs corresponding to PB ratios above 3x)

- PB ratio: Only 1.4x at end-2025, representing a 13% discount to emerging markets and a 33% discount to developed markets

– ROE levels are relatively low, significantly lagging behind international peers such as Goldman Sachs and Morgan Stanley

Segment Three: Three Key Drivers – Pension Reform and ISA Policy (00:11:40 ~ 00:16:00)

The Korean market exhibits a triple combination of 'low valuation + earnings momentum + institutional reform,' with policy-driven capital expected to provide sustained long-term support. Pension reform: South Korea’s public pension fund exceeds USD 1 trillion in assets under management (the world’s third-largest), with a contribution rate of approximately 9.5% (the lowest among developed countries). The government is pushing to raise this rate, which over the long term will generate consistent domestic purchasing power;

ISA policy:Retail investors who transfer overseas stocks into an ISA account and invest in domestic equities can be exempted from the 22% capital gains tax, encouraging repatriation of domestic savings back into the local equity market.

Segment Four: Commercial Law Amendments and Corporate Governance Reforms (00:18:00 ~ 00:22:00)

Since 2023, the South Korean government has advanced amendments to the Commercial Act, upgrading corporate governance from 'voluntary adoption' to 'mandatory regulation'—the most critical institutional driver for valuation rerating. The reforms require transparent board responsibilities and implementation of online cumulative voting rights for minority shareholders;

The most pivotal provision: Starting February 2026, companies will be prohibited from accumulating treasury shares and must cancel them, requiring firms to return cash to shareholders via dividends or buybacks.

Segment Five: Lessons from Japan and Alpha Opportunities (00:51:20 ~ 00:54:40)

Japan initiated similar corporate governance reforms around 2003, followed by a sustained market rally lasting over a decade that continues to this day—even amid frequent external concerns about 'overvaluation.' South Korea is currently in the early stages of its reform cycle; if it follows Japan’s trajectory, the structural rerating phase may be far from over.Investors are advised to first position themselves based on sector logic (banks → brokerages → holding companies), then drill down into individual stocks to select companies actively pursuing reform, while avoiding sectors driven solely by momentum trading.

IV. Q&A

Q: Beyond financials, brokerages, and holding companies, do sectors such as shipbuilding and defense offer structural opportunities?

A: The defense sector is driven by global geopolitical instability, offering high elasticity but extreme volatility—defense stocks saw a pronounced pullback in April as geopolitical tensions eased, reflecting the adage 'high returns come with high risks.' Semiconductors are highly correlated with Taiwan’s market: when Taiwan rises, Korea tends to follow. However, at the individual stock level, balance sheets and liquidity should be closely scrutinized. This sector is not recommended as a source of meaningful alpha but rather viewed as a momentum-driven trade.

Q: Korean retail investor accounts have doubled since the pandemic, with cash balances increasing eightfold. If the Kospi corrects by 15–20%, would there be significant capital outflows?

A: Retail investors directly hold only 15–20% of the Kospi, primarily concentrated in small- and mid-cap stocks, and thus are not the main pricing force behind the broader index. More importantly, ISA account regulations require holdings to be maintained for at least one year to qualify for tax exemptions, which inherently creates a lock-up effect. Retail investors purchasing large-cap blue chips through ISAs do so primarily for tax benefits, not short-term speculation, making this capital more stable than commonly assumed.

Q: Is the Samsung strike event a good buying opportunity?

A: Such events constitute market noise. Investors should focus on company fundamentals—if Samsung's core competitiveness and profitability remain fundamentally unchanged, one could consider small, opportunistic positions during short-term volatility caused by the noise, but chasing the price upward is not advisable. What truly matters is determining whether fundamentals have shifted, not letting short-term headlines drive investment decisions.

Q: With U.S. Treasury yields continuing to rise, what impact does this have on emerging markets like Korea?

A: In the current environment, interest rates lack both strong upward momentum and clear catalysts for a meaningful decline. Global corporate earnings remain broadly sustainable, and there are no evident signs of macroeconomic deterioration. Against this backdrop, Korea’s interest rate sensitivity is relatively contained. The key remains to 'follow the money'—track incremental flows from domestic pension funds, retail ISA accounts, and foreign institutional allocations—rather than betting on the direction of macro interest rates.

Q: Excluding Samsung and SK Hynix, how do the valuation and recent performance of the Korean market look?

A: Overall P/E and P/B ratios have not fully reflected the improvement in fundamentals. For example, in March, when global markets corrected by 8–10%, Korea—having experienced stronger gains beforehand—saw a pullback of 13–15%. In April, as positive U.S. semiconductor policy developments took effect, Korea rebounded by over 16%, outpacing the global market’s average recovery. While the broader Korean market moves in tandem with global trends, it continues to trade at a significant valuation discount; sustained policy reforms remain the core driver of its upside potential.

Q: How much incremental capital could Korea’s pension reform bring into the market annually?

A: It is difficult to estimate precisely, but the direction is clear. In 2008, Korea’s national pension fund allocated 30% of its assets to domestic equities, a share that has since steadily declined to 15–20%. If this allocation were to return to its historical peak, the resulting incremental inflows would be substantial. Currently, pension funds account for approximately 7% of total investment in Korea’s equity market. Within the current market structure, domestic institutional investors represent 25–30% of the investor base, while foreign professional investors make up 40–45%; the latter group’s continued inflows constitute the more significant marginal driver.

144K Views