By Craig Mellow

South Korea's political chaos may boost its long-suffering stock market, ushering in sorely needed corporate governance reforms -- eventually.

Legislators united to beat back President Yoon Suk Yeol's Dec. 3 martial law declaration within a day. The aftermath is messier.

Parliament impeached Yoon, but his removal depends on a Supreme Court decision that could take months more. The opposition Democratic Party pushed through a partisan vote to impeach his stand-in, Han Duck-soo, on Dec 27. DP leader Lee Jae-myung was himself convicted of election law violations in November. At the start of 2025, investigators failed to arrest Yoon after they were blocked by his Secret Service.

No wonder the iShares MSCI South Korea exchange-traded fund has dropped 8% since Yoon's coup attempt, resulting in a 22% loss for 2024.

Things could get better in 2025. Korea watchers expect the court to remove Yoon, and the DP to win accelerated elections. The left-leaning opposition party has promised to amend the country's commercial code to include a fiduciary duty of corporate directors to shareholders.

The current code requires "duty of loyalty to the company," says Jonathan Pines, lead portfolio manger for Asia ex-Japan at Federated Hermes. That fine-print distinction is a major cause of the "Korea discount," he explains.

Management-loyal boards allow industrial chaebol like Samsung Electronics to contract with related companies, hold cross-shareholdings that maintain founding family control, and skimp on dividends, among other abuses. Taiwan, a neighboring market with a similar lineup of tech powerhouses, trades at twice Korea's multiples, Pines calculates.

Yoon's approach to the problem, a mostly voluntary "Value-Up" program instituted last February, had limited effect. "A change in the legal framework will be very significant," Pines says.

Of Korea's "Big Four" chaebol -- Samsung, SK Holdings, Hyundai Motor, and LG -- Hyundai is the most shareholder friendly, aiming to return 35% of profit to shareholders through dividends or buybacks, says James Lim, a partner at Dalton Investments.

But he and other investors are focusing first on banks, which are largely out of chaebol control and have embraced Value-Up more enthusiastically. Shares in industry giant KB Financial Group are off more than 15% since Dec. 3, trimming 2024's gains to around 60%.

Dips like this are worth buying on, says Daniel Hill, an analyst covering financials globally at William Blair Investment Management. Valuations for Korean banks remain depressed at around 0.5 times book value for the national players and 0.3 times for regionals. He reckons fair value is at least 0.7. "Despite headwinds from intense competition and heavy consumer leverage, I would argue that banks can rerate," he says.

Those aren't the only headwinds. South Korea has the world's lowest birthrate. Housing prices have fallen 8% from a bubble-ish peak in 2022, according to the U.S. Federal Reserve. The country is braced for macroeconomic crossfire as Donald Trump reassumes office in Washington, its prodigious export stream more or less equally divided between the U.S. and China.

Those exports, led by high-value electronics and machinery, won't be easy to substitute in the U.S. or anywhere else, though, Lim argues. "[U.S. producer] Micron can't all of a sudden make all the world's memory chips," he observes.

Outweighing all negatives for markets may be South Korea's army of postpandemic retail stock investors: up to 15 million from a population of 52 million. That's a potent political force for governance reform, Pines says. "There's a huge public interest now against a tiny number of families who will lose," he says.

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January 03, 2025 21:30 ET (02:30 GMT)

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