The Analyst: is Korea becoming harder to ignore?

South Korea overtaking the UK makes a great headline, but market size alone isn’t a reason to invest.

In late April, South Korea became the world’s eighth-largest equity market, with its listed companies valued at around $4.04 trillion (£3.05 trillion), compared with $3.99 trillion for the UK. Incredibly, at the end of 2024 the UK market was roughly twice the size of South Korea’s.

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The more interesting story is what has driven such a dramatic change. Korea combines a powerful position in the global artificial intelligence (AI) supply chain, with efforts to improve corporate governance and shareholder returns. But opportunities extend well beyond technology.

After such a strong rally, investors should expect volatility and if the so-called Korea Discount continues to narrow, and improving profitability and shareholder returns spread beyond the semiconductor giants, South Korea could become increasingly difficult for global investors to ignore.

At the heart of the AI boom

South Korea occupies an important position in the global technology supply chain, particularly through semiconductor giants Samsung Electronics Co Ltd DR (LSE:SMSN) and SK hynix Inc ADR (NASDAQ:SKHY).

Together, the two companies account for around 70% of global DRAM (Dynamic Random-Access Memory) revenues, a type of memory used for short-term data processing, and 50% of NAND revenues, the memory used for longer-term data storage.

Memory chips are increasingly important to AI infrastructure, particularly high-bandwidth memory (HBM), which is used in advanced AI servers.

There is also an argument that this demand is becoming more structural. Memory chips have traditionally been highly cyclical and dependent on demand for PCs and smartphones. AI data centres and cloud computing are potentially creating a powerful additional source of long-term demand.

When South Korea overtook the UK in market size, Samsung Electronics and SK Hynix together accounted for more than 40% of the South Korean KOSPI’s total market value, highlighting its heavy concentration in its two semiconductor giants.

Therefore, buying the Korean market may look like a country allocation, but a significant part of the investment case remains a bet on semiconductors and the durability of the AI investment boom beyond the country’s borders.

But Korea’s stock market is much more global than its name suggests. Only around 40% of MSCI Korea revenues come from South Korea itself, reflecting the international nature of many of its largest companies.

Will the ‘Korea Discount’ narrow?

AI has been the main driver behind this recent strong performance. However, an additional interesting and longer-term story is that of corporate governance.

For decades, Korean companies have tended to trade at lower valuations than many international peers, something commonly described as the “Korea Discount”.

Complex ownership structures, conservative capital allocation, relatively weak shareholder returns and concerns about minority shareholders have all contributed.

The Korean government is trying to change this with its Value-Up programme, launched in 2024, which encourages companies to focus more explicitly on shareholder returns and capital allocation. For example, SK Hynix announced its own Value-Up plan in November 2024, including a 25% increase in its annual fixed dividend. Changes to the Commercial Act have also sought to strengthen board accountability and fiduciary oversight.

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Investors compare these reforms to those in Japan, where corporate governance changes have been accompanied by a greater focus on capital efficiency and shareholder returns.

Whether Korea can achieve a similar change in corporate behaviour remains uncertain. But even incremental improvements could matter when many Korean companies continue to trade at substantial discounts to international peers.

Korea is more than chips

Investors shouldn’t assume that South Korea is simply Samsung, SK Hynix and a basket of other technology companies.

The country has globally competitive businesses spanning shipbuilding, defence, power infrastructure, robotics, batteries and electric vehicles. Korean companies may also benefit as governments and businesses seek more resilient and politically aligned global supply chains.

Then there is K-culture. Korean music, film, cosmetics and consumer brands have become increasingly popular internationally, while healthcare areas such as medical aesthetics and biopharmaceuticals are expanding overseas.

The global reach of Korean entertainment is increasingly visible in Western markets too. Katseye, the global girl group created through a partnership between South Korea’s HYBE and US-based Geffen Records, toured in London and Manchester in September as part of its 2026 arena tour.

So, the growing export of Korea’s culture, technological developments and consumption trends, and the resultant implications for market breadth could become increasingly important for future returns. The next stage of Korea’s re-rating may depend on whether improving earnings and shareholder returns spread beyond the semiconductor giants.

Market performance and valuations

The MSCI Korea Index had a strong rally over the 12 months to the end of August, delivering 167% and 90% year to date in sterling terms. Given the size and dominance of Samsung Electronics and SK Hynix in the Korean equity market, both stocks contributed significantly to this strong performance.

But the rally has come with extreme volatility - one-year annualised volatility for MSCI Korea of around 70%, compares with approximately 24% for emerging markets and 11% for the MSCI World.

Interestingly, Korean equities still look relatively cheap on conventional valuation measures such as price/earnings (PE) and price/book (PB), trading on around 6 times forward earnings, compared with 12 times for emerging markets and 19 times for developed markets.

Source: Morningstar 12 months to the end of August 2026. Past performance is not a guide to future performance.

But investors should be careful before concluding that Korea is a bargain.

A price/earnings ratio has two parts: price and earnings. Korean share prices have surged, but earnings expectations, particularly for semiconductor companies, have risen even faster.

If those profits materialise, today’s valuation could still look attractive. If expectations around AI demand, memory-chip pricing or future profits prove too optimistic, the apparently cheap valuation could prove misleading.

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Retail investors join the rally

Korean retail investors have become significant buyers during the recent rally and account for close to half of stock market trading. Leveraged exchange-traded funds (ETFs) have added further momentum, including the launch of South Korea’s first single-stock leveraged ETFs in May. Leveraged ETFs amplify the gains or losses you make from a fund, meaning the returns can be substantial but so can the risks.

While greater domestic participation could provide another source of demand for Korean equities, increased use of leveraged products may also amplify market moves, adding another reason for investors to expect volatility.

How can investors gain exposure?

For investors who believe the structural story has further to run, perhaps the more interesting question isn’t simply whether to invest in Korea, but how to invest, with both active and passive routes to gain exposure.

Barings Korea I GBP Acc (B9M3RQ4) is one popular active option. The fund has been investing in Korean companies for more than three decades and has the flexibility to look beyond the largest companies in the index. That could become increasingly relevant if Korea’s next phase is driven not simply by Samsung and SK Hynix, but by improving governance and opportunities across industrial, healthcare and consumer companies.

Recent absolute performance has been exceptionally strong, although investors should note that the fund has not kept pace with its benchmark during the latest rally. The ongoing charge is 0.95%.

For investors who prefer a low-cost passive approach, the Franklin FTSE Korea UCITS ETF GBP (LSE:FLRK) tracks the FTSE Korea 30/18 Capped Index. The ongoing charge is only 0.09%, which makes it considerably cheaper than an actively managed Korea fund. However, while this capped index restricts the largest stock exposure to 30% of the portfolio (and 18% thereafter), the ETF’s top 10 holdings still comprise around 65% (for reference, not too far from double the level of concentration of the S&P 500). Investors need to be comfortable with the extreme degree of concentration in the country’s largest companies.

A third option is to gain exposure through a broader Asian or emerging markets fund, such as Fidelity Asia W Acc (B6Y7NF4), which may make more sense for investors who like the Korean story but don’t want the concentration risks associated with investing in a single country.