South Korea ended 2025 as the best‑performing major equity market in the world – KOSPI index surged 83%1 that delivered a significant tailwind to Federated Hermes’ Asia ex‑Japan Equity Strategy, which had a big overweight to the country. But after such a stellar year, the question for investors is obvious: what happens next?
The Strategy has reduced exposure after such a sweeping re-rating. But we do not believe the opportunity is over.
South Korea remains inexpensive relative to other countries (and our benchmark), and as specific laws addressing governance weaknesses continue to be implemented during 2026, we hope the news flow will continue to provide a positive backdrop for the country’s stocks.
We have, accordingly, retained our overweight to South Korea.
Governance reforms
We estimate that about half of the rise in the South Korea’s leading Kospi Index during 2025 was because of improvements to corporate governance in the country, and about half was because of investor enthusiasm around artificial intelligence (AI) and semiconductors.
We believe our own efforts played a potentially significant role in spurring the corporate governance overhaul in South Korea, with all six key recommendations we made in an earlier report in 2024 now in various stages of adoption and implementation.
With these changes, South Korea has addressed the main reasons for the so-called ‘Korea discount’, which had led to local companies persistently trading at lower price-to-earnings multiples than their global peers.
Meanwhile, the election of President Lee Jae Myung in June last year – who made raising the level of the South Korean stock market central to his campaign – should ensure that corporate government remains a priority in the country.
The country’s still-very-high inheritance tax rate – which is difficult to avoid, even with effective tax planning – remains an obvious weakness as it remains a powerful incentive to keep stock prices low. But while the inheritance tax issue is not being immediately addressed by lawmakers, it might be addressed in the future.
A disciplined trim
Of course, any time stocks rise as quickly and as high as South Korea’s, there is always the risk of a market pullback. As a result, we have progressively cut the extent of our overweight to South Korea, which now stands at 12% (from a peak of 20%), leaving us with an absolute weight of 27% in South Korean stocks.
We reduced our overweight mainly by selling the stocks that had performed the best – such as high beta plays like stockbrokers.
In terms of our remaining South Korean holdings, we are comfortable that they all still represent good price-to-value propositions – even after the soaraway stock price rises that took place last year.
Banks, though well governed, have less to gain from reform, and flagship positions like KB Financial have been exited due to capital‑return limitations.
We reduced our overweight mainly by selling the stocks that had performed the best – such as high beta plays like stockbrokers.
However, core structural holdings remain – most notably Samsung Electronics, one of the world’s leading memory chip makers. The company is cash rich, and trades on a price-to-book multiple of 1.8 times. Although this valuation is above its own long-term average of 1.5 times, Samsung represents perhaps the cheapest large-cap global AI play.
Samsung’s earnings are forecast to increase sharply this year, driven by a rise in ‘commodity’ memory prices (rather than any unique success Samsung has had in developing AI chips). The company’s earnings growth expectations for 2026 leave iton a forward price-to-earnings multiple of a mere 7 times.
Additional exposure comes via Samsung Life and Samsung Fire & Marine, both of which could unlock shareholder value as reforms unwind complicated ownership loops.
Other South Korean holdings – Youngone, Shinhan Financial, Korea Investment Holdings, Lotte Fine Chemical and Kumho Petrochemical – are retained on valuation grounds and the expectation that cyclical earnings will rebound.
Rotation into China and Thailand
We have used some of the cash raised from cutting our South Korean exposure to buy additional positions in China and Thailand, where we have found several new attractively-priced opportunities.
Almost all of the Strategy’s 5.4% annualised gross alpha since inception2 has come from stock selection, not country allocation. Even years when being in the ‘wrong’ countries hurt performance, their bottom-up picks compensated.
The process is strict: any stock must plausibly deliver at least a 15% annual return over five years. This pushes the team toward attractively priced companies with compelling growth or rerating potential, regardless of benchmark weight.
We anticipate that 2026 will see a continuation of a reversal that might have begun in 2025, as South Korea and China continue to outperform. We remain overweight South Korea and China (and more recently, Thailand). We expect broad outperformance of stocks in these countries to sooner-or-later result in country outperformance, which we hope will supplement our ongoing outperformance from stock picking.
FHL Asia ex-Japan Equity Letter to Investors 2026
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1 In USD. Source: Bloomberg as at 31 December 2025.
2 Past performance is not a reliable indicator of future performance.
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