Value-Up in South Korea in 2026, how a country wants to reduce its valuation discount

The short version

• South Korean companies have traded below comparable firms elsewhere for decades. A state Value-Up programme, the mandatory cancellation of repurchased shares and extended fiduciary duties are meant to change that.
• Capital is already following. Foreign investors are unwinding underweights, and new tax incentives steer domestic money out of property and foreign shares into the home market.
• The biggest risk is still the semiconductor cycle. If prices or demand cool off, earnings could give way quickly.

What the valuation discount is

A valuation discount exists when the companies of one country are permanently valued lower than comparable companies elsewhere, measured for instance by price to earnings. The discount says nothing about the quality of the businesses. It reflects how far investors trust the way returns are shared out.

Large family groups shape the South Korean economy. They consist of numerous affiliated companies that often hold stakes in one another. The controlling family can therefore exercise considerable power through a small share of the capital, and outside shareholders carry little weight in a vote.

Three criticisms followed. Low payouts, restructurings in favour of the controlling families, and a use of profits that was not always in the interest of all shareholders. Spin offs were the most contested case. A valuable unit was carved out of a listed company and floated separately, and the shareholders of the parent effectively lost part of their value.

What the programme covers

The first building block is the state programme. It pushes companies to publish plans for raising company value. It relies on visibility rather than compulsion, because published plans are comparable and companies without one stand out.

The second building block is the mandatory cancellation of repurchased shares. A company that buys back its own shares can keep them and reissue them later, for instance to management. Only cancellation lowers the share count permanently and raises the profit per remaining share.

The third building block is extended fiduciary duties. Boards must act in the interest of the company. It was long disputed whether that interest is the same as the controlling family's. Extending it to all shareholders changes the legal position on restructurings, spin offs and mergers considerably.

The fourth building block is tax incentives for domestic investors.

Why capital follows

Reforms alone do not move prices. Two movements are taking shape.

The first concerns foreign investors. A fund is underweight when it holds less of a market than that market's share in the benchmark, which is a deliberate bet against it. Unwinding that bet creates buying that rests on nothing more than a return to a neutral weighting.

The second movement works at home. A very large part of private wealth sits in property, and many private investors had also shifted into foreign shares because prices there performed better. Both drew capital away from the domestic market. For policymakers the reversal is doubly useful, because a stronger stock market makes households wealthier and eases pressure on an expensive property market.

Japan as a yardstick and the cycle risk

The same process began in Japan a decade earlier. Reforms since 2015 and 2016, among them mandatory outside directors and initiatives of the Tokyo stock exchange to raise returns on equity, produced a visible development, and spin offs from large conglomerates keep increasing. What the Japanese case mainly shows is the time involved. The rule, the change in company practice and the confidence of investors each take their own years, while one prominent case at the expense of minority shareholders destroys that confidence quickly.

The open risk sits in semiconductors. The industry is unusually cyclical, because plants are expensive and capacity grows only in large steps. Capacity is currently shifting from ordinary working memory to high bandwidth memory for artificial intelligence, which drives prices and profits. Those profits support the re rating and are at the same time its biggest risk. Only when the cycle turns will it show how much of the narrower discount goes back to the reforms.

Frequently asked questions

What is the Korea discount

The observation that South Korean companies are permanently valued lower in international comparison than comparable companies elsewhere. The causes are held to be the structures of large family groups, low payouts and the limited influence of minority shareholders.

What does the Value-Up programme cover

According to market observers, a state programme to raise company value, the mandatory cancellation of repurchased shares and extended fiduciary duties. On top come tax incentives for domestic investors.

Why is the cancellation of repurchased shares so important

Because repurchased shares that are not destroyed can be issued again later. Only cancellation lowers the share count permanently and thereby raises the profit per remaining share.

Where does the capital come from

From two directions. Foreign investors are unwinding their underweights, and domestic investors are shifting out of property and foreign shares into the home market because of new tax incentives.

What is the biggest risk

The dependence on the semiconductor cycle. The earnings momentum depends heavily on how long it lasts. If prices or demand cool off, earnings could give way quickly.

This analysis is for information only and is not investment advice.