By Craig Mellow

For investors in South Korea's sizzling stock market, it's the corporate governance, stupid. That and the microchips.

Last month's massive U.S. immigration raid on a Hyundai Motor factory in Georgia threw a monkey wrench into Seoul's vital trading relationship with Washington. President Lee Jae-myung announced that Korea, with about $415 billion in currency reserves, can't afford to invest a promised $350 billion in the U.S. all at once.

U.S. counterpart Donald Trump insisted he wants the money "upfront." Otherwise, Korean imports will return to their "reciprocal" tariff rate of 25%, instead of 15%. "Korea is in a pretty tough spot now," says Darcie Draudt-Vejares, a fellow in Korean studies at the Carnegie Institute for International Peace.

Markets don't care. The iShares MSCI South Korea exchange-traded fund has climbed 14% since the Sept. 4 raid, bringing its year to date gain to nearly 60%.

Investors are focusing instead on what Lee and his Democratic Party, who took power in June, are doing to improve the corporate governance regime at the heart of the traditional "Korea discount." It took them a month to pass the most critical legislation, extending corporate directors' fiduciary duty to shareholders.

Korea's relatively new army of retail investors is mobilizing to defend its interests directly, adds James Lim, portfolio manager for Korea at Dalton Investments. The arcana of how KCC, a Hyundai-linked investment vehicle, deploys treasury shares, has become front-page news, forcing the company to back off maneuvers that benefited insiders.

Korean stocks stand to gain a lot more from global markets' artificial intelligence mania than they do to lose from Trump tariffs. Hyundai, the top auto maker, accounts for 2% of the market index. Semiconductor powers Samsung Electronics and SK Hynix make up a third. Samsung shares have leapt nearly 30% over the past month as its most advanced high-bandwidth memory chip won approval from Nvidia for inclusion in cutting-edge AI hardware.

Both Samsung and the broader market have more room to run, says Jonathan Pines, lead portfolio manager for Asia ex-Japan at Federated Hermes. "Samsung has been the laggard of the global AI theme," he says. "It still has a long way to catch up."

The same goes for Korea writ large as governance reform continues, Dalton's Lim argues. The legislature is mulling restrictions on, if not the outright liquidation of, treasury stock, which founding families use to maintain their sway over conglomerates. Lawmakers may also slash taxes on dividends from a maximum 50% to 25%, encouraging payouts to shareholders.

These and other improvements could drive Korean companies' average price-to-book value ratio from 1.1 to Japan's level of 1.6, Lim predicts, translating to another 40% climb in stocks. "We are invested across the Korean market," he says.

Like other leaders around the world, Lee may be getting a boost back home from the Trump administration's perceived disrespect.

His approval ratings are holding around 60%, high for a country that tends toward polarization, Draudt-Vejares says. The need for unity in the face of U.S. pressure may be muting resistance from the chaebols whose economic dominance Lee's governance reforms are eroding. "Right now, it's all hands on deck for negotiating these tariffs," she says.

Investors sound more confident than Koreans themselves. "The tariff threats are a little bit of noise," says Kimball Brooker, co-head of the global value team at First Eagle Investments. "Risk-return-wise, Korea is still one of the most attractive markets in the world."

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

October 03, 2025 02:30 ET (06:30 GMT)

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