As we look across Asia in early 2026, one of the clearest stories is the sharp divergence in market performance. South Korea has been the standout. The market rose 76% in 2025 and added another 47% year‑to‑date as of late February. This follows a decade of underperformance – what many called the “Korea Discount”. Now, we’re seeing a genuine structural re‑rating from a very low base. So, the natural question is: Can this rally sustain? And the answer lies in four key areas.
First, valuations remain compelling. South Korea trades at around 1.8x book, and 9x forward earnings – still well below global peers, despite triple‑digit earnings growth led by semiconductors.
Second, South Korea is at the centre of the AI semiconductor supercycle. AI-related high‑bandwidth memory exports are up 44% year‑on‑year, and strength is broadening into AI-peripheral sectors, like autos, defence, nuclear, shipping, and materials. This is no longer a narrow, chip‑only story. It is a wide‑ranging industrial upgrade.
Third, governance reforms are gaining traction. The government’s ‘Value‑Up’ Program, mandatory treasury‑share cancellations, and expanded fiduciary duties are reshaping corporate behaviour and narrowing the structural discount.
Fourth, the policy and flow backdrop is supportive. Foreign underweights are reversing, and new domestic tax incentives are encouraging investors to rotate away from property and overseas equities into their home market. But, for balance, we must acknowledge the biggest medium‑term risk: Korea’s earnings momentum depends heavily on the durability of the semiconductor cycle. If pricing or demand cools, earnings could soften quickly. Even with that risk in mind, Korea remains one of the most attractively valued developed markets globally. For long‑term investors, this still feels like the early to mid‑stages of a multi‑year re‑rating.
Now: China. A very different picture. After a strong 2025, China enters 2026 with macro resilience, but market fragility. Chinese equities are up only around 1% year‑to‑date, dramatically lagging South Korea and Taiwan. One important driver is global: there has been a major rotation into AI hardware which has disproportionately benefitted South Korea and Taiwan, but not China.
Domestically, China also faces headwinds. Consumption remains soft, with retail‑sales growth slowing to 1.3% late last year. The property sector continues to weigh on household confidence. Policy support has been modest, limiting any sharp demand recovery. Export momentum has softened, especially relative to tech‑leveraged North Asia. These pressures are clearest in tech. The Hang Seng Tech Index is down 20% from its peak and over 10% year‑to‑date. But this is not the full story.
Under the surface, China’s structural growth engines remain intact – rising research and development intensity, a decisive push toward technological self‑reliance, and large‑scale upgrades across manufacturing and energy. And, importantly, earnings are stabilising. Consensus now expects a mid‑teens rebound in 2026. Competition has eased, the ‘anti‑involution’ push has reduced destructive price wars, and margins are improving.
Crucially, this does not rely on a GDP surge. It reflects companies operating more efficiently. The emerging Five‑Year Plan reinforces this shift: AI, semiconductors, digital infrastructure, green energy, advanced manufacturing, a stronger social safety net, and a reduced dependence on property‑driven growth.
The message is clear: China is moving from a ‘growth at all costs’ message towards quality, resilience, and productivity. The hyper‑growth era is gone – but a more balanced, innovation‑led China is emerging. For patient investors, that can be genuinely powerful.
