Stephen Dover, chief market strategist (CMS) and head of research at Franklin Templeton, the U.S. asset manager overseeing approximately $1.7905 trillion in assets, said resolving South Korea’s “Korea Discount” depends not on simple share-price gains but on institutional reform and a qualitative shift in shareholder returns.
In a recent interview with Maeil Business Newspaper and The Korea Economic Daily, he assessed the gap between South Korea and Japan this way: “From a global investor’s perspective, Japan is already at a stage where trust has been built, whereas South Korea is still in a catch-up phase.”
Dover divided the discount factors weighing on South Korea’s equity market into two broad categories: a “cyclical discount,” where share prices are depressed by weak corporate earnings, and a “structural discount,” rooted in distrust of the country’s institutional and market framework. “As demand for AI semiconductors and earnings prospects have improved recently, the cyclical discount has narrowed quickly, but the structural discount remains,” he explained.
According to Franklin Templeton, the MSCI Korea Index was up 82.6% year-to-date and 166.4% over the past year as of end-August. Even so, its forward price-to-earnings ratio stood at just 5.06 times. In other words, despite the sharp rally, the market’s valuation relative to corporate earnings remains low.
Four Barriers Behind the Structural Discount
The strategist pointed to market-access issues—long cited as obstacles to South Korea’s inclusion in the MSCI Developed Markets Index—as the core drivers of the structural discount. He identified four hurdles on the “road to investing in South Korea.”
The first is offshore won conversion. Currently, it is difficult to freely buy and sell the won outside South Korea, constraining foreign investors’ ability to move capital. Investor verification procedures also need improvement. Restrictions on physical transfers and over-the-counter trading are another item on the to-do list. On top of this is the issue of foreign-exchange market liquidity. Particularly during overnight trading hours, the market is not deep enough for large global funds to move in and out smoothly, he noted.
Even so, South Korea’s equity market is changing in a positive direction, largely because shareholder returns have become a central market theme. The problem, however, is not “quantity” but “quality.” “For global investors, the manner of shareholder returns matters as much as the scale,” he stressed.
Investors look at whether shareholder returns are sustained, whether they are backed by actual cash flow, and whether announcements translate into concrete actions such as share buybacks and cancellations. “We want consistent capital-allocation principles regardless of the economic cycle—not one-off announcements made after the stock price has already risen,” he said. “What South Korean companies still lack is predictability.”
Ultimately, companies, authorities, and the foreign-exchange market must all change together for foreign capital to flow in meaningfully and for the Korea Discount to enter a genuine resolution phase. “Once reforms take hold, the upside potential for South Korea will be greater than Japan’s,” he predicted.
Caution on Semiconductor Concentration and the Three Phases of AI Investment
Dover advised South Korean investors to reduce their heavy concentration in semiconductors. “The high concentration in semiconductors is both South Korea’s blessing and its curse,” he said. “South Korean investors who are overly concentrated in semiconductors should now consider taking profits and diversifying their portfolios.”
He maintained an optimistic view on the semiconductor cycle itself. With AI driving productivity gains and requiring expanded computing capacity, semiconductor demand should remain strong for the foreseeable future. However, he drew a line: “The pace of AI change and the scale of investment are unprecedented, and competition in the semiconductor industry is fierce, making it difficult to pick the ultimate winner.” The point is to distinguish between industry growth and individual companies’ investment outcomes.
On AI investment, he explained that the benefits are shifting through three phases. Phase one was semiconductors and foundational technology; phase two was real estate, industrials, and energy needed for data centers; and now the market is moving into phase three, where companies that adopt AI to boost productivity are drawing attention.
“Business services sectors such as financials and healthcare, which can use AI to improve efficiency and profitability, will be the next beneficiaries,” he said. In particular, he emphasized: “If I had to invest in just one sector for five years, it would be industrials. Ultimately, the core function of AI that the market expects is productivity improvement, and if that expectation is realized, industrial companies will reap substantial profits over the long term.”
U.S. Equities and Portfolio Strategy
On U.S. equities, he sees ample room for further upside. Just as South Korean corporate earnings have grown rapidly on the back of the semiconductor recovery, U.S. earnings growth is accelerating faster than share prices, reducing the concern that stocks are expensive relative to fundamentals.
While money has recently flowed back into large-cap technology stocks, he expects the rally in small- and mid-cap stocks and value stocks to continue. He was clear, however: “I’m not saying to sell Big Tech.” His advice is to maintain exposure to large-cap growth stocks but broaden the investment scope across the market rather than concentrating in specific names or sectors—because he believes the current AI boom is different from the dot-com bubble of the past.
He also urged investors to continue investing in risk assets while reducing concentration risk. “Because I’m positive on the market, it’s better to invest broadly rather than take on concentrated risk,” he stressed. That means small-cap stocks, equal-weighted strategies where each holding carries the same weight, and expanding one’s horizon to markets outside the United States.
Beyond equities, other asset classes could offer attractive investment opportunities through the second half of this year and into next year. He cited strategies such as buying and holding long-term bonds issued by AI companies with strong cash flows, and direct investments in innovative unlisted small companies, as potential sources of high returns.
On bonds, however, he warned that they may struggle to deliver the traditional diversification benefit within a portfolio, because the conventional inverse correlation between stocks and bonds has broken down. “If inflation comes in higher than expected, stock and bond prices could fall together,” he said, emphasizing the importance of portfolio construction that considers risk as well as return.
On South Korea’s equity market, he said, “Given its growth potential, valuations are not particularly expensive,” but he also distanced himself from excessive optimism: “I don’t expect the magnitude of gains seen in South Korea’s market over the past two years to be repeated.”