Broader plays to tap into 2025’s star stock market

Coming into 2025, few would have predicted that South Korean equities would be one of the top performers in global markets over the likes of the US, which investors expected to continue to dominate returns for global equities, buoyed by the artificial intelligence (AI) tailwind and prospects of deregulation under a new White House administration.

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So far this has been anything but, the Korea Stock Exchange (KOSPI) was up 37.9% year-to-date to 31 July, while the S&P 500 returned only 2.5% on a sterling basis. This rally has been driven by optimism surrounding the election of President Lee Jae Myung, after a period of political turmoil. Lee’s pledges include a refocus on economic revitalisation and corporate governance reforms.

The corporate governance reforms introduced by the new administration will look to address the “Korea discount”, something that previous governments have attempted, unsuccessfully, to unwind in the past. The Korea discount refers to the phenomenon where Korean equities have experienced persistently lower valuations compared to peers and the implications of this can be significant, from hindering a company’s ability to attract capital to constraining job creation and economic growth.

The discount can be attributed to the dominance of family controlled conglomerates (chaebols) such as Samsung Electronics Co Ltd DR (LSE:SMSN) and Hyundai in the Korean economy. Given the family control, chaebols are often indifferent to share prices and lack transparency and accountability, which are major concerns to minority investors who are often an afterthought.

Lee’s corporate governance reforms align with the Corporate Value-Up programme already introduced by regulators in early 2024. The Value-Up programme encourages publicly listed companies to share their long-term strategies for increasing shareholder value.

To encourage sign up, the programme offers incentives such as tax support and the possible creation of a “Korea Value-Up Index” to include those firms that are shareholder friendly and financially transparent with the aim of enhancing investor confidence and promoting best practice.

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Bringing it back to the current administration’s reforms, amendments to the Commercial Act were swiftly passed in early July as President Lee entered office in June with a strong parliamentary backing. Key measures of the reforms include expanded fiduciary duty for company directors who are now legally obligated to act in the interests of all shareholders not just the company, and mandatory electronic shareholder meetings, both of which are ultimately aimed at improving corporate governance.  

While corporate governance reforms are still in their infancy, investors have certainly welcomed them as seen by the stellar performance of Korean equities so far this year. If similar reforms in Japan are anything to go by, Korean equities might be something investors will be hearing a lot more about in the future.

Fund routes to tap into the region

On the interactive investor Super 60 investment ideas list, the Fidelity Asia fund could be an active option to potentially gain exposure to Korean equities.

The fund has been managed by Teera Chanpongsang since January 2014. His investment career began at Fidelity in 1994 during which he has built a commendable track record on multiple Asian strategies including Fidelity Thailand, Fidelity India Focus and Fidelity Emerging Asia.

Chanpongsang has been dedicated to managing Asia ex-Japan equity mandates since 2008 and he is supported by Fidelity’s experienced Asia-Pacific ex Japan equities analyst team comprising of 46 members.

The fund leverages Fidelity’s deep analytical resources to identify firms that are beneficiaries of structural growth opportunities trading below their intrinsic value in Asia. Management quality is a key consideration, as well as the level of shareholder returns and prudent accounting policies.

Chanpongsang targets three types of companies, those with strong franchises that have dominant industry positions with market-leading brands or solutions (these make up 60% of the portfolio); growth companies that exhibit improving growth profiles; and value companies, which are expected to re-rate from cyclical downturns or from a broad market sell-off (these make up less than 20% of the portfolio).

The portfolio typically holds 60 to 80 holdings at any time with active sector and country sizes limited to plus or minus 10% relative to the MSCI AC Asia ex-Japan index, while active weights for individual holdings are kept within 5% of the benchmark. The portfolio tends to be overweight IT and consumer discretionary sectors, driven by Chanpongsang’s preference for industry-leading franchises.

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From a South Korean perspective, the portfolio holds market heavyweights, Samsung Electronics and SK Hynix (the two make up 40% of the Korean market). Both companies are leading producers of memory chips, which are seeing further demand due to the AI wave.

For those looking to own a slice of the market, the iShares Pacific ex Japan Equity Index fund and the Fidelity Index Emerging Markets fund are potential options that have an allocation to South Korea. The iShares Pacific ex Japan Equity Index fund tracks the FTSE World Asia Pacific ex Japan Index, which is made up of large and mid-cap companies of developed and advanced emerging markets in Asia Pacific excluding Japan. The fund currently has a 18.8% allocation to South Korea.

The Fidelity Index Emerging Markets fund has a 10.1% allocation to South Korea and tracks the MSCI Emerging Markets Index, which captures large and mid-cap companies across 24 emerging market countries and covers approximately 85% of the free float-adjusted market capitalisation of each country.

Brian Hui is an investment analyst, at Morningstar.