South Korea’s stock market is having a moment

SEOUL – Even as the K-pop heartthrobs of BTS plot their return to arenas worldwide after their military service, the hottest thing in South Korea lately has been its stock market.

Global investors poured almost US$3 billion (S$3.8 billion) into Korean equities in May and June, propelling the country’s benchmark index up about 28 per cent in the first half of 2025, trailing globally only Slovenia’s blue-chip index, a gauge of Zambian equities and a basket of 20 Polish stocks.

It is a dramatic turnaround for a place that has undergone huge political and economic turmoil in recent months: a declaration of martial law (rescinded hours later), a presidential impeachment and removal from office, and US President Donald Trump’s 10 per cent tariffs – scheduled to jump to 25 per cent on July 9 – which threaten to wreak havoc on South Korea’s export juggernauts such as Hyundai, LG and Samsung.

Despite those hurdles and the global malaise stemming from wars in the Middle East and Ukraine, investors are piling into Korean stocks because, they say, the country’s business culture is poised for a sharp transformation. “Such movements are unstoppable once they start,” says Korea Investment Management portfolio manager Kim Ki-baek.

For decades, the economy has been ruled by so-called chaebol, family controlled companies that rose from the rubble of the Korean War seven decades ago.

These companies, including the aforementioned giants and lesser-known outfits that make everything from K-pop hits to steel, have long been criticised for weak corporate governance, stifling competition and skirting inheritance taxes.

With support from authoritarian governments in the 1960s and ’70s, they have helped transform South Korea into an economic powerhouse, and today the top four companies account for more than half the value of the Kospi 200 Index.

But increasingly, regulators and investors consider these companies a liability, responsible for what the market calls the Korea discount, the lower valuations of the country’s equities versus those of their peers in Taiwan and Japan.

Although the discount has long been blamed on the proximity of the belligerent regime in North Korea, there is growing consensus that the root cause has more to do with concerns about corporate governance at the chaebol.

South Korea’s recent turmoil has had at least one benefit: The expectation of more investor-soothing corporate legislation.

Voters replaced ousted President Yoon Suk Yeol with Mr Lee Jae Myung of the Democratic Party; with his party controlling Parliament, he has got a far better chance of passing laws regarding the capital markets.

Topping the lawmakers’ agenda are measures aimed at stopping companies from benefiting founding families to the detriment of minority shareholders.

During the campaign, Mr Lee frequently pledged to lift the Kospi to 5,000, or about double its level at the time, and he has created an ad hoc “Kospi 5000” committee that has been tasked with implementing his capital markets promises.

Even though reaching 5,000 any time soon seems unlikely – the index hit 3,000 on June 20, a couple of weeks after the election – the pledge has filled investors with optimism.

“At this stage, I don’t think 4,000 is impossible,” says Taurus Asset Management equity investment manager Cha So-Yoon. “That’s because we have the fundamental support of the companies this time around.”

Locals are (quite literally) invested in the outcome.

Almost 30 per cent of South Koreans now own shares, more than double the level in 2019, and they have become a powerful political force.

In 2024, objections from retail investors helped scuttle a proposed merger of two independent affiliates of Doosan Group, a maker of construction equipment that calls itself Korea’s oldest company.

Around the same time, their protests spurred lawmakers to scrap proposed capital gains taxes on small holdings of domestic stocks.

Investors know that changing the chaebol structure will not be easy.

In 2015, Elliott Management failed in an effort to block the merger of two Samsung affiliates on concerns that the deal undervalued a company in which the activist hedge fund held shares.

Several former presidents have also tried to implement various reforms, but they have encountered strong resistance.

For instance, the impeached president backed measures aimed at boosting shareholder returns, but they were not binding, so chaebol directors rarely followed them.

Mr Lee, who often says he’s an “ant” – what small investors call themselves, in reference to their power when working together – is proposing mandatory changes.

“The Democrats now will have a much easier time,” says Mr Jon Withaar, a fund manager at Pictet Asset Management in Singapore, praising the new president for “being so deliberate in trying to unwind the Korea discount”.

NH-Amundi Asset Management head of equity investment Park Jinho says one way to persuade the chaebol to accept the changes would be to avoid measures that their founders perceive as punitive.

And he suggests lowering taxes on dividends or inheritance, which are among the world’s highest, to offer families a way to diversify.

“The conglomerates have contributed greatly to the Korean economy,” Mr Park says. “There should be policies that give them a fair way to accumulate wealth.” BLOOMBERG