South Korea’s stock market has forced investors to reconsider the “Korea Discount,” one of Asia’s most persistent undervaluation stories. The Korea Composite Stock Price Index (KOSPI) tripled between the end of 2024 and May 2026, lifted by government reform, AI-fueled semiconductor demand, and rising momentum in defense, shipbuilding, and nuclear power. A market long viewed as structurally undervalued suddenly began to look like one in the early stages of a rerating.
The shift is significant because the Korea Discount was never just about low multiples. It reflected deeper concerns about shareholder returns, capital allocation, and governance structures that often appeared to favor controlling shareholders over minority investors. Recent reforms have begun to address those issues, while earnings momentum in globally competitive sectors has given investors a reason to reassess South Korea’s potential.
Yet BCG’s 2026 South Korea Value Creators study finds that the rally has not lifted all companies equally. More than 60% of listed South Korean enterprises still trade below book value, and much of the market’s recent gain has been concentrated in a handful of sectors.
The first wave of South Korea’s rerating was powered by sector momentum and policy reform. The next will depend on whether companies can improve capital efficiency, strengthen shareholder returns, and earn the investor trust required to sustain higher valuations. Those that fail to do so will face greater pressure from shareholders.
This article summarizes the study’s findings. For comprehensive details, download the full report.
Sector Momentum and Policy Reform Lift Performance
South Korea’s equity market delivered one of the strongest performances among major global markets in 2025. The KOSPI's total shareholder return (TSR) reached approximately 76%, far exceeding the roughly 22% average across the top ten global indices. (See Exhibit 1.) Almost all of that return came from share-price appreciation rather than dividends, suggesting that the rally was not simply the result of higher cash returns to shareholders. It reflected a broader shift in how investors valued South Korean equities.
South Korea’s equity market delivered one of the strongest performances among major global markets in 2025.
That shift was visible in South Korea’s price-to-book ratio (PBR). The KOSPI’s average PBR rose from 0.8x in 2024 to 1.4x at the end of 2025, with further expansion to 1.9x expected in 2026. At the same time, market expectations for return on equity (ROE) rose sharply: from 7.0% in 2024 and 7.7% in 2025 to 22% in 2026, and is projected to sustain that level in 2027. Because PBR is closely linked to an organization’s ability to generate returns above its cost of equity, this improvement suggests that investors are beginning to reassess whether South Korea’s long-standing structural discount is still justified.
Two forces drove this first wave of rerating. The first was earnings momentum in four sectors: semiconductors, shipbuilding, defense, and nuclear power. These sectors benefited from powerful structural tailwinds, including AI-driven demand for memory chips, rising geopolitical demand for defense and shipbuilding, and renewed policy and export momentum in nuclear power. As a result, their market capitalizations rose sharply, and their growing weight in the index lifted the broader market. The total KOSPI market capitalization expanded approximately threefold compared with 2024, with the market cap of semiconductors and hardware growing approximately fivefold. Shipbuilding, defense, and nuclear power each grew three- to sixfold.
The picture for other sectors—financials, autos, health care, consumer goods, and media and entertainment—is markedly different. Market cap gains for most of these sectors were less than twofold over the same period, and profitability improvement was limited.
The second force was government reform. South Korea’s capital market revitalization policies directly targeted several of the issues long associated with the Korea Discount: weak shareholder returns, inefficient capital allocation, governance structures centered on controlling shareholders, dual listings, and concerns about market fairness. Commercial law amendments, the Corporate Value-Up Program, dividend tax reforms, and proposed restrictions on value-destructive corporate structures all signaled a more forceful effort to align corporate behavior with shareholder value. (See Exhibit 2.)
These reforms matter because they address the institutional roots of South Korea’s valuation gap. Expanding directors’ fiduciary duties toward all shareholders, strengthening audit committee independence, encouraging disclosures, incentivizing dividends, and tightening scrutiny of dual listings all point in the same direction: a market in which capital efficiency and shareholder returns become harder for enterprises to ignore.
The Rerating Remains Incomplete
Despite the recent rally, however, South Korea’s estimated 2026 PBR of 1.9x remains below that of the US, Taiwan, India, and Europe. Critically, the improvement has been highly concentrated. More than 60% of listed South Korean firms still trade below book value.
Despite the recent rally, however, South Korea’s estimated 2026 PBR of 1.9x remains below that of the US, Taiwan, India, and Europe.
Outside the four leading sectors, average ROE stands at around 7%—below the roughly 10% cost of equity most investors would require. An ROE below COE means the business is not generating even the minimum return required on the equity capital that shareholders expect.
These conditions create a paradox. On headline metrics, South Korea now appears to have one of the highest ROE profiles among major equity markets. But investors remain cautious because much of that improvement is concentrated in a few cyclical or globally exposed sectors, especially semiconductors. The broader market has not yet demonstrated a structural, economy-wide improvement in capital efficiency.
That is why the first wave of South Korea’s rerating should be seen as a beginning, not an endpoint. Government policy and sector earnings have changed investor expectations. But a sustainable rerating will require broader corporate action. The next phase will depend on whether businesses beyond semiconductors, shipbuilding, defense, and nuclear power can improve ROE, allocate capital more effectively, and deliver consistent shareholder value.
Why TSR Improvement Is No Longer Optional
For South Korean companies, improving TSR is no longer simply a matter of investor preference. It is becoming a strategic imperative.
There are two reasons. First, South Korea’s equity market is becoming more important to household wealth creation. Household assets have historically been concentrated in real estate and other illiquid assets, but policy efforts are increasingly aimed at shifting more capital toward equities. As a result, the number of domestic retail investors has risen sharply. With equity ownership broadening, corporate value creation becomes not only a market issue but also an economic and social priority.
Second, shareholder activism is becoming more forceful. Organizations that underperform on TSR may face pressure that extends beyond calls for higher dividends. Activists are increasingly willing to push for board changes, executive replacement, portfolio restructuring, and asset sales.
Shareholder activism is becoming more forceful. Organizations that underperform on TSR may face pressure that extends beyond calls for higher dividends.
The central challenge is capital efficiency. South Korean companies have not lacked earnings growth. Over the past decade, aggregate net income grew at a solid pace. But ROE barely improved, as excess cash, non-core assets, and continued investment in low-return businesses diluted returns.
Learning from Japan’s Experience
Japan followed a different path. Starting in 2014 under the Abe administration, the government spent a decade reshaping how companies managed capital, governance, and investor relations. Over that period, Japan’s net income growth was similar to South Korea’s, but ROE improved more significantly. The difference was not simply better operating performance; it was a more disciplined approach to capital. The Japanese restructured non-core businesses, expanded dividends, bought back and canceled shares, and increasingly managed against cost-of-capital expectations. The market rewarded that shift with a sustained rerating.
The Japanese restructured non-core businesses, expanded dividends, bought back and canceled shares, and increasingly managed against cost-of-capital expectations. The market rewarded that shift with a sustained rerating.
South Korea is now expediting a comparable transformation, compressing into a few years what Japan built over a decade. Japan’s journey offers a clear lesson: government reform helped create the conditions for change, but the companies that benefited most were those that acted decisively. Two examples stand out:
- Hitachi simplified a highly complex business structure, exited more than 20 listed subsidiaries, and refocused its portfolio around core digital infrastructure businesses. It also strengthened board independence, reinforcing investor confidence that capital would be allocated with greater discipline. ROE improved from –29% in 2009 to 14% in 2022. Over the same transformation period, Hitachi’s stock rose approximately 5.5x; by early May 2026, it had risen nearly 20x from its 2009 level.
- Dai Nippon Printing took a different but equally instructive path. In 2023, the organization made capital efficiency an explicit management priority, setting public targets of ROE of at least 10% and PBR above 1x. It shifted its portfolio away from mature printing businesses toward higher-growth areas such as semiconductors and displays, while also executing approximately ¥300 billion in share buybacks. ROE rose from a decade-long average of 3.2% before the announcement to an average of 8.3% afterward. Since early 2023, the company’s stock has risen approximately 2.6x.
These cases show why corporate execution matters. Markets rewarded both enterprises not simply for improving operations, but also for making capital efficiency, portfolio discipline, and shareholder returns central to the value creation agenda.
A South Korean Transformation
Signs of a similar shift are emerging in South Korea. Some businesses have improved TSR not by riding the strongest sector tailwinds, but by changing how they manage profitability, capital allocation, and shareholder returns. For example:
- Hyundai Elevator used overseas business restructuring as its starting point for improving profitability. Building on that recovery, it raised its dividend payout ratio to an average of approximately 150% over the past two years, and in the process improved ROE from 14% to 20%. By simultaneously improving operational performance and aggressively returning capital, the firm raised both capital efficiency and investor confidence.
- JB Financial Group has consistently paired profitability management with shareholder returns. By targeting niche customer segments to expand net interest margins and improve loan loss ratios, it steadily built earnings power while efficiently managing capital through active share buybacks. The result has been five consecutive years of about 12% in ROE—among the strongest levels for South Korean financial holding companies—demonstrating to the market the fruits of consistent capital-efficient management.
The two organizations operated in different sectors and took different approaches, but the message is the same: when capital allocation and shareholder returns are placed at the center of management strategy, enterprise value improvement can follow. These changes remain confined to a handful of leading companies for now, but for the South Korean capital market to sustain its rerating, these approaches must spread across the market.
When capital allocation and shareholder returns are placed at the center of management strategy, enterprise value improvement can follow.
What Companies Must Do Now to Improve TSR
TSR improves when business strategy, financial strategy, and investor strategy are aligned. For many South Korean businesses, this requires a shift in aspiration: from being a “great company” to becoming a “great stock.” Operational strength still matters, but it is no longer enough. Companies also need to show they can convert strong operations into superior capital efficiency, shareholder returns, and market confidence.
The starting point is understanding why TSR is low, and then taking action depending on whether the root cause is profitability, capital allocation, shareholder returns, governance, or market communication. Organizations need to clearly diagnose the factors weighing on their valuation before deciding where to act.
Once the sources of undervaluation are clear, companies should focus on three areas. The weight given to each will vary by firm, but these kinds of moves have generated the greatest TSR improvement across the broadest range of situations.
Business strategy: reshape the portfolio around value creation. Many South Korean companies still have capital tied up in low-return businesses, non-core assets, excess cash, listed subsidiaries, or holdings with limited strategic rationale. These assets dilute ROE and make it harder for investors to see where value is being created.
The first move is therefore portfolio discipline. Companies should identify which businesses and assets earn returns above the cost of capital, which are strategically essential, and which should be restructured, sold, or monetized. Capital should be concentrated in areas where the business has a clear right to win and can generate attractive returns.
This does not mean shrinking for its own sake. It means shifting from scale-driven management to value-driven management. Businesses that cannot generate adequate returns should no longer be protected simply because they are familiar, historically important, or part of a broader group structure. Where dual listings or complex ownership structures create valuation discounts, companies should also review whether those structures continue to serve shareholders.
Financial strategy: make capital allocation a management discipline. The second move is to bring greater rigor to how capital is deployed. Every major investment should be evaluated against the cost of capital, with return on invested capital (ROIC) used as a core decision metric. Investments that cannot earn returns above weighted average cost of capital (WACC) destroy value, even if they add revenue or accounting profit.
This discipline should not end when the investment is approved. Post-investment monitoring can track whether returns are materializing as planned and whether additional capital is justified. Without this feedback loop, capital can continue flowing into businesses that underperform expectations.
Companies also need a more deliberate approach to idle cash and shareholder returns. Excess cash may provide financial flexibility, but it also depresses ROE when it is not tied to clear strategic use.Firms should therefore pursue attractive reinvestment opportunities—or else return capital to shareholders through predictable dividends, buybacks, and treasury share cancelation.
Consistency and clarity are critical. Investors value shareholder return policies they can understand and underwrite. That’s why a clear multiyear policy—supported by transparent payout targets and disciplined execution—helps to build trust and reduce the valuation discount. Every unit of capital should have a clear value-creation rationale.
Investor strategy: build trust through targets, communication, governance, and incentives. To make value creation visible and credible to the market, companies need a clear equity story that answers the question, Why invest here? Revenue and profit targets are not enough. Instead, weave a tale of business strategy, capital allocation, shareholder returns, and specific financial targets to communicate how you plan to improve ROE, allocate capital, and measure progress over time.
This is how investor relations (IR) becomes a strategic capability. Rather than simply reporting historical results or managing disclosure obligations, IR should help communicate the company’s future value creation roadmap, not alone but collaboratively—with business units, finance, the board, and management all aligned behind the same story. Thus, investor communication becomes a CEO-level agenda item.
Governance and incentives must reinforce the same direction, with boards ensuring that capital is allocated in support of shareholder value. Executive compensation should be linked to not just revenue or operating profit, but also to ROE, TSR, and long-term value creation. When incentives are aligned with shareholder outcomes, managers will make more disciplined choices when it comes to allocating capital.
Consistency and clarity are critical. Investors value shareholder return policies they can understand and underwrite.
South Korea’s capital market has entered a new phase. The first wave of rerating was driven by government reform and sector momentum, especially in semiconductors, defense, shipbuilding, and nuclear power. To close the valuation gap with global peers, South Korea now will need broader, more durable improvement across the corporate sector.
The next wave of value creation will depend on organizations themselves. Those that improve capital efficiency, allocate capital with discipline, strengthen shareholder returns, and communicate a credible equity story will be best positioned to earn investor trust and sustain higher valuations. South Korea’s market has shown what reform can unlock. The next decade will show which companies can convert that momentum into sustained shareholder value.
