South Korean stocks remain ‘undervalued’, says Goldman after huge rebound from March losses

South Korea's Kospi delivered a 75% return in 2025 and has since rallied another 40%, supported by strong AI-related semiconductor demand and earnings upgrades. Goldman Sachs says corporate governance reform is improving incrementally, with more share buybacks and treasury share cancellations, though 70% of Kospi constituents still trade below book value. Separately, South Korea's energy minister called the Iran war a turning point for accelerating the country's shift to renewable energy, as Seoul targets 100GW of renewable capacity by 2030 versus 37GW currently.

Analysis

The cleanest read-through is that Korea is morphing from a pure AI semiconductor beta trade into a broader capital-allocation rerating story. That matters because once governance reform starts to translate into buybacks, treasury cancellations, and higher payout discipline, the market multiple can expand even if top-line growth moderates; the first beneficiaries are the domestic financials, industrials, and conglomerates with idle balance sheets, not just the memory names that have already re-rated.

The second-order effect is that this is a scarcity trade in a market where a large share of names still screen cheap on book value. If the reform cycle keeps progressing, the under-owned parts of the index can catch up quickly because local retail and passive flows are concentrated in a few large winners; that creates room for mean reversion in mid-caps and holding companies that have been structurally discounted for years. In other words, the upside from reform is less about another leg higher in the mega-cap chips and more about breadth expansion.

The main risk is timing: governance improvements tend to disappoint on a quarter-by-quarter basis, and the market may be pricing a faster Japanese-style rerating than policy execution can deliver. On the macro side, Korea’s import dependence on energy makes it vulnerable to any renewed oil spike, which could hit margins and sentiment before reform benefits compound. That argues for a months-long trade horizon rather than a days-only momentum chase.

Consensus is probably underestimating how much of the revaluation can come from capital returns rather than earnings. If management teams can sustain buyback/cancellation cadence, the index can keep rising even without another step-up in AI demand, but if the semiconductor cycle cools at the same time energy costs rise, the current premium can compress fast. The best asymmetry is to own reform beneficiaries that have not yet fully participated, while fading the most crowded chip winners on strength.

Key Decisions for Investors

• Go long KOSPI reform laggards via a basket or proxy exposure for 3-6 months; best risk/reward is in cheap-to-book names with capacity for buybacks, where rerating can come from multiple expansion even if earnings are flat.
• Pair trade: long Korea broad-market reform beneficiaries / short the most crowded memory-chip exposure over 1-3 months; this monetizes the gap between already-priced AI optimism and the broader governance rerating still to come.
• Add a tactical hedge against Korea energy vulnerability: long an oil-sensitive inflation hedge or buy downside protection on Korean cyclicals for the next 1-2 quarters, as a renewed crude spike is the fastest way to derail the thesis.
• For event-driven positioning, buy Korea-related upside optionality into the next AGM season and sell into post-event volatility; governance progress is likely to be lumpy, but each incremental capital-return announcement can trigger sharp short-covering.
• If you want a cleaner relative-value expression, pair long Korean financials/industrial holding companies against short a regional market less exposed to governance rerating, targeting 10-15% alpha over 6 months if buyback discipline persists.