Korea Stock Strategy: Markets That Met All Conditions (JPM)

1. Market Strategy and Outlook • Seoul stocks up 64 percent on MSCI Korea basis this year, top among major global markets • The government and regulators maintain their willingness to improve corporate governance, and the revision of the commercial law and tax reform are likely to be completed by the end of this year • S. Korea likely to top Kospi 5,000 as governance discount eases and improves financial structure despite overheated global valuation • KOSPI Band Offers 4,000-5,000 Within 12 Months • Investor Position Has Not Yet Fully Reflected Corporate Governance Improvement Effect, Exists Additional Upside Capacity
2. Governance reform and institutional change • First revision (July 22): Expanding the board’s duty of good faith to all shareholders • 2nd Amendment (September 9): Mandatory cumulative voting and improved procedures for appointing audit committee members • Future Challenges: Additional reforms such as mandatory tender offer system, treasury stock disposal, insurance business law, fair trade law, and dividend taxation reform are expected • The “Value-up Program” contributes to improving corporate awareness and is expected to accelerate shareholder returns and strengthening stewardship codes before shareholders’ meetings in 2026 • Actual implementation will begin in earnest after 2027, and differences in legal interpretation and establishment of enforcement infrastructure are pointed out as challenges
3. Valuation and Rerating Logic • South Korean market starts at 8x fwd P/E, 0.9x P/B level, can be re-rated up to 100% in case of structural improvement • Buyback size increased by more than 80% compared to 2024 based on YTD in 2025, most of which was incinerated, substantially contributing to shareholder value enhancement • If ROIC rises from 7% to a global average of 11%, there is room for further upside through the sale of non-core assets and share buybacks • Valuations Still Significantly Discounted Against Global: Japan Low P/B-ROE Position In All Industries vs Europe • Expected to reduce the value gap around structural themes such as governance, AI memory, and industrial goods (shipbuilding, defense, power facilities)
4. Stock Price Momentum and Earnings Cycle • Momentum Factor enters re-rising segment after mid-term adjustment • S. Korean firms’ falling profit outlook cycle ends shorter than in past, confirms earnings revision stabilization in all major sectors • Memory prices (especially DRAM, HBM) have no further signs of decline, maintain growth based on AI demand • The DRAM/HBM industry is in the midst of a multi-year expansion cycle, and the proportion of AI DRAM’s TAM is gradually increasing
5. Policy and political risk assessment • A single government will be launched as a result of the general election in June 2025 to ensure policy consistency and drive • The president’s approval rating is still high, and there is a high possibility of continuing governance reform.l • However, some systems have risks of implementation before and after the 2028 general election • Good feedback structure between regulators and businesses, and the value-up implementation monitoring system is expected to be maintained
6. Leading sectors and stocks • Preferred industries: Memory, finance, holding company, and industrial goods (disinfection, shipbuilding, and power facilities) • Non-preferred Industry: Bio, Some Platforms, Valuation Burden Section Among Material Stocks • Major Preferred Items: Samsung Electronics, SK Hynix, Hanwha Aerospace, Hyundai Motor, Naver, Shinhan Financial Group, Samsung C&T, Samsung Life Insurance, HD Hyundai, HD Hyundai Electric, Samsung Fire & Marine Insurance, LG Chem, SK • Non-preferred stocks: Celltrion, Kakao, POSCO Future M, SK Bio, Kakao Pay, NCsoft
7. Structural and psychological improvement effects • Improving regulations and expanding shareholder returns can induce domestic investors to ease their preference for overseas stocks (reverse overseas purchases) • By narrowing the gap in capital cost perception and enhancing transparency, a structure that enables market revaluation centered on intrinsic value is formed • Ultimately, it increases the possibility of escaping from ‘undervalued structural traps’ in the Korean market