South Korea has experienced significant political and economic turmoil recently, including an attempted imposition of martial law by its president in December, leading to his impeachment and removal from office. Subsequently, President Trump's trade war adversely affected South Korea's export-driven economy, particularly its automotive and electronics sectors.
Despite these challenges, South Korea's stock market has rebounded, becoming the top performer in Asia during the first half of 2025. The benchmark Kospi index has surged by 30 percent since the start of the year, outperforming major global indexes.
In comparison, the S&P 500 in the United States has increased over 20 percent since April but only 6 percent this year. Analysts credit the rise in South Korea's market primarily to the return of a unified government under the newly elected President Lee Jae Myung, who has promised investor-friendly reforms.
Economic policy analyst Tom Ramage noted that the stability brought by a new president following the martial law declaration has positively influenced market sentiment. In the previous year, South Korean stocks suffered as investors favored Taiwan for its advanced semiconductor production, and political instability further dampened investor confidence.
The South Korean market has long been affected by the "Korea discount," where companies trade at lower valuations compared to similar firms in other markets, largely due to weak shareholder rights and the dominance of family-controlled conglomerates, known as chaebols.
Approximately two-thirds of the Kospi index is held by domestic investors, with about a third of voters owning stocks directly. Investing in stocks is considered a preferable method for wealth accumulation compared to the overheated real estate market in Seoul.
Mr. Ramage emphasized that enhancing the stock market's attractiveness for shareholders could provide a healthier avenue for wealth building. The former administration's attempts to address the Korea discount were met with skepticism from investors, failing to secure reclassification as a developed market, which could have attracted significant foreign investment.
President Lee has committed to addressing stock undervaluation, proposing regulatory changes to benefit shareholders and encouraging dividend payouts from companies. With his Democratic Party holding a majority in the National Assembly, the potential for implementing these reforms appears more viable compared to the previous administration.
International fund managers have shown renewed interest in South Korea's market, viewing it as a ripe opportunity for reform. HSBC's chief Asia equity strategist, Herald van der Linde, noted a growing excitement among both domestic and foreign investors.
Additional positive factors for South Korean stocks include stabilizing manufacturing despite sluggish economic growth and demand for specific products like small nuclear reactors and cargo ships. However, the economic landscape remains uncertain, with ongoing U.S. tariffs impacting exports and financial reforms still unproven.
Investors are hopeful for deeper structural changes within chaebols, such as addressing complex inter-company linkages that can misalign management and shareholder incentives. Mr. van der Linde acknowledged that while untangling these relationships could enhance profitability and valuations, it would require considerable time and effort.