Blue-chip surge lifts index, but experts say discount debate isn’t over yet

An electronic board at Woori Bank’s dealing room in Seoul shows the Kospi at 5,019.54, gaining 109.61 points, or 2.23 percent, from the previous session, along with a message that reads the index has broken through the 5,000-point threshold for the first time, Thursday. (Lee Sang-sub/The Korea Herald)
An electronic board at Woori Bank’s dealing room in Seoul shows the Kospi at 5,019.54, gaining 109.61 points, or 2.23 percent, from the previous session, along with a message that reads the index has broken through the 5,000-point threshold for the first time, Thursday. (Lee Sang-sub/The Korea Herald)

South Korea’s benchmark stock index Kospi surged past the 5,000-point mark for the first time during trading Thursday, raising expectations that the long-standing “Korea discount” — a term referring to the relatively low valuation of domestic stocks — may finally be fading.

After opening at 4,987.06, up 1.57 percent from the previous session, the Kospi quickly surged past the 5,000 mark for the first time, reaching as high as 5,019.54. The index partly pared the gains in the following hours, standing at 4,992.39 as of 2 p.m., up 1.68 percent, from the previous session.

With the Kospi climbing to a fresh high, blue-chip stocks also hit new records. Samsung Electronics shares surged to a record-high of 157,000 won ($107) during intraday trading, briefly touching 160,000 won during pre-market hours. Hyundai Motor topped 590,000 won for the first time in trading, while SK hynix climbed to an intraday high of 773,000 won.

The Kospi first crossed the 3,000-point threshold in January 2021, but remained stuck in the 2,000-point range for more than four years thereafter, quoted at 2,547.06 on Jan. 22, 2025, a year earlier.

Following the inauguration of the new administration in June, the index has staged a sharp ascent, underpinned by government-led initiatives aimed at strengthening shareholder returns and boosted investor sentiment.

As a result, the Kospi reached 4,000 points for the first time on Oct. 28, and just three months later, it made history, soaring past 5,000 points.

End of stock devaluation?

Though the Kospi has nearly doubled over the past year, experts say the Korea discount is far from over, with lingering challenges still to be addressed.

“Following the impressive rally, Korean equities’ valuation has improved but remains relatively lower than global peers,” Sue Lee, APAC head of Index Investment Strategy at S&P Dow Jones Indices, said.

She pointed out that the 1-year forward price-to-earnings ratio for the S&P Korea Broad Market Index — which tracks the overall performance of Korean equities — stands at 17 times, well below that of the global benchmark, the S&P Global BMI, at 21 times, and that of economic peer Taiwan at 24 times.

“This suggests there may be further upside potential for Korean companies’ valuations, provided ongoing efforts by the government and corporations continue,” Sue Lee said.

Lee Hyo-seob, senior research fellow at the Korea Capital Market Institute, said, "The Korea discount has eased significantly, but it is still too early to say it is over."

Roughly half of the Kospi’s recent gains were driven by improved corporate earnings. Policy changes — the true driver behind the Korea discount — accounted for the other half, suggesting further upside for the index as the discount is fully resolved, he explained.

Experts agreed that the undervaluation can only be fully eliminated through further governance reforms of corporations.

“Progress is evident in certain areas — for instance, increased focus on shareholder returns has resulted in higher dividend payouts over recent years — though further enhancements are needed for Korea to fully align with developed market standards,” Sue Lee said.

Lee Hyo-seob noted that the government has largely done its part to support the equity market, adding that the onus now lies with companies to follow through. From a price-to-book-value ratio perspective, the Kospi has the potential to rise toward 6,000 points, he said.

“For a true resolution of the Korea discount, corporates must demonstrate concrete implementation of governance reforms, principled retirement of treasury shares and broader shareholder return measures,” he said.

Market analysts viewed the Kospi’s rally as sustainable, though a moderation in pace is warranted for the time being.

“With earnings and liquidity continuing to drive the market, the Kospi’s medium-term upward trajectory is expected to remain intact,” said Choi Jae-won, an analyst at Kiwoom Securities.

While the Kospi’s early-year gains were heavily concentrated in large-cap stocks — with Samsung Electronics and SK hynix gaining 29 percent and 16 percent, respectively, and Hyundai Motor’s shares surging 81 percent year-to-date — the market is likely to shift toward broader stock diffusion, Choi said.

“The sharp rally since the start of the year has resulted in technical overheating, and amid heightened external uncertainties, a period of volatility is likely, warranting short-term moderation in the Kospi’s pace,” he added.

By Im Eun-byel (silverstar@heraldcorp.com)