Korea discount fight now in companies’ hands: Morgan Stanley

The next phase of South Korea's market rerating will depend on whether companies improve governance, capital allocation and returns on equity, according to Morgan Stanley's Korea Chief Strategist Joon Seok.

"Rather than (government) policy, we believe the ball is in the corporate sectors' and stakeholders' court," Seok said in a written interview with The Korea Herald.

Morgan Stanley's assessment of Korea's reform drive has shifted markedly from April last year, when it viewed the country as still being in the "first inning."

"At this juncture, where we have seen comprehensive Commercial Code revisions, dividend tax regime change and revised treasury share rules, we now think Korea's reforms overall have reached the third inning, while policy path is probably closer to the fifth inning," Seok said.

Government policy still matters for narrowing the valuation gap.

"Corporate governance reform together with adroit government policy are the key to mitigating the Korea discount, in our view," he said.

But with much of the policy framework now in place, the focus is shifting to companies to show that reform can translate into higher sustainable returns and better capital management.

Seok said Korea Inc. needs what he described as a change in its "corporate DNA," referring to Korean companies improving governance, restructuring businesses where needed and, most importantly, using capital more efficiently.

Morgan Stanley remains bullish on Korean equities, maintaining a Kospi target of 9,000 for June 2027. But Seok said the next leg will need to be steadier and less dependent on a narrow group of large technology stocks.

"From here, we believe that the climb back to 9,000 needs to be steadier and to show a broadening out into other sectors," he said.

Chipmakers account for about 55 percent of the Kospi's market capitalization and have contributed more than half of its market value gains this year. If the major chipmakers rise about 50 percent, roughly in line with Morgan Stanley's target prices, that alone would take the Kospi to around 8,500, Seok estimated. Reaching 9,000 would require stronger performance elsewhere.

There are signs that earnings momentum is becoming less concentrated. In 6 of 10 sectors covered by Morgan Stanley in Korea, more than 40 percent of companies were expected to see upward earnings revisions during the second-quarter earnings season, compared with about 30 percent in technology.

For foreign investors, however, broader earnings growth alone may not be enough to turn Korea from a cyclical trade into a strategic long-term holding.

"There has been a tendency for Korean equities to be an attractive early-cycle trade on an EM upturn, but as a long-term strategic holding, the cyclicality of the key sectors has been a hurdle," Seok said, noting Morgan Stanley has dubbed the market "Dr. Kospi" for its role as a forward indicator of global macroeconomic upturns.

That perception may be starting to shift as advanced manufacturing gains greater prominence globally. Alongside AI-related chipmakers, Seok pointed to energy infrastructure, defense and shipbuilding as Korean industries benefiting from the changing investment landscape.

External factors could still challenge the recovery. Seok identified the AI capital expenditure cycle and semiconductor supply-demand dynamics as the biggest risks, with the Fed's policy path and Middle East tensions also important.

At home, corporate transformation is likely to take time.

"Improvements should come gradually as this is a major transformation for the corporate sector," Seok said. "A holistic policy framework that has a balance of sticks and carrots is needed to incentivize stakeholders to change."

Seok will join The Korea Herald's 2026 HIT Forum as a panelist on Tuesday at the Korea Chamber of Commerce and Industry in Seoul. Held under the theme "Korea Premium: Connecting Korean Opportunities with Global Capital," the forum will examine Korea's appeal to global investors.