Franklin Templeton: "Korea Discount Narrows, But Governance and Capital Allocation Must Improve"

Strong AI Memory and Defense Exports Fuel Growth
Rally Expected to Be More Sustainable Than Before

Franklin Templeton, a global asset management firm, has identified governance reform and improved capital allocation as key drivers to address the "Korea Discount"—the chronic undervaluation of the Korean stock market. While advancements in AI memory infrastructure and defense exports have enhanced Korea's investment appeal, Franklin Templeton emphasized that changes in corporate behavior are needed before the market can be consistently re-rated.

According to Franklin Templeton's latest analysis report on the Korean equity market released on April 27, the firm highlighted that the KOSPI had delivered a return of about 42% as of mid-April, significantly outperforming not only other emerging markets but also the S&P 500 Index.

Dina Ting, Global Index Portfolio Head at Franklin Templeton ETF Division, Franklin Templeton

Franklin Templeton analyzed that Korea possesses structural strengths in the global buildout of AI infrastructure. With overwhelming competitiveness in the high-bandwidth memory (HBM) sector—essential for AI workloads—Korea has emerged as one of the biggest beneficiaries of the AI investment era. The firm noted that as global investment in AI infrastructure accelerates, Korea's traditional strengths—such as capital intensity, manufacturing capabilities, and engineering scale—are being rediscovered.

Reflecting this trend, the total assets of Korea-focused equity ETFs reached approximately $94 billion as of mid-April, with net inflows of about $21 billion since the beginning of the year. Franklin Templeton stated, "This shows that the Korean market has now fully moved away from its previous underweight positioning."

Franklin Templeton also pointed to "defense industry" as another growth driver for Korea. According to key indicators, Korea has become one of the world's top five arms exporters, supplying a range of systems from artillery platforms to advanced military vehicles. Notably, as NATO member states—including Germany—actively increase their defense budgets, Korea has emerged as a reliable large-scale supplier. Franklin Templeton explained that the defense sector's long-term contract structure, geopolitical importance, and independent earnings stream are bringing diversification benefits to Korea’s industry, which is otherwise heavily focused on semiconductors.

Franklin Templeton cited several visible signs that the Korea Discount is being addressed: increased visibility of shareholder return policies, expanded share buybacks, a modest rise in dividends, and broader participation in the "Value-up" program.

However, the firm noted that the discount has not been fully resolved. The report emphasized that governance reform and improved capital allocation will be the ultimate forces driving consistent valuation re-ratings. It added, "The market will judge Korea not only by the government’s policy commitment but also by repeated corporate actions."

Dina Ting, Global Index Portfolio Head of the Franklin Templeton ETF Division at Franklin Templeton, said, "The sharp rise in energy prices due to the Iran conflict has highlighted Korea's vulnerabilities, but these are manageable business costs rather than structural limitations." She added, "Korea’s technological competitiveness is gradually offsetting these burdens, and with both its strength in HBM and a growing defense export cycle of meaningful economic scale, Korea now possesses two key growth engines. This rally is likely to be more sustainable than before."

Ting further emphasized, "The Korea Discount has narrowed, but it has not disappeared. The core drivers for continued re-rating are not AI or defense, but rather governance and capital allocation."

This content was produced with the assistance of AI translation services.