Asia Perspectives - A post-presidential election reboot of domestic engines of growth for South Korea

Highlights: Lee Jae-myung of the progressive Democratic Party of Korea (DPK) won the 21st South Korea presidential election held on 3 June. The DPK had already secured an absolute majority in the National Assembly in the 2024 elections. In our view, the election result could help reduce the elevated political uncertainty over the past six months, and will benefit South Korea’s stock market as well the country’s broader industrial base, given the strong mandate from the election (the voter turnout rate of 79.4 per cent being the highest in nearly 30 years) and Lee’s pledges, which have the support from the National Assembly, to improve corporate governance, boost consumption, and push through deregulation.

• A victory by Lee could lead to a quick loosening of fiscal policy, given the size of his pledged spending as well as the DPK’s past policy track record and fiscal tendencies. Lee has pledged to implement a supplementary budget of KRW35trn+. This could provide a boost to South Korea’s GDP growth, which has been on downtrend in terms of y-o-y growth over the past four quarters, with the Q1 GDP 2025 print even showing a surprise y-o-y contraction. We estimate the additional spending could potentially add a cumulative 0.2-0.3ppt to GDP growth across 2025 and 2026. Our current GDP growth forecast stands at 0.7 per cent/1.4 per cent for 2025/2026
• We expect plans to improve corporate governance to gain momentum as the new president has pledged to tackle the “Korean discount” to boost the domestic stock market. While we anticipate South Korea may still need time to fully implement corporate governance reforms, we expect that a renewed emphasis on this front with DPK controlling both the executive and legislative branches would re-accelerate efforts to improve corporate governance and increase shareholder returns. This should attract more foreign inflows to the stock market. This also ties in with our Q3 High Conviction theme “Power Up Asian Shareholder Returns”
• While we retain our neutral stance on South Korean stocks and KRW as we await more clarity to South Korea’s geopolitical and trade-related uncertainties after the sharp stock market rebound, we note that South Korean equity market valuations are not demanding, and see selective investment opportunities in companies that could benefit from policy support and/or corporate governance reforms on the back of a re-acceleration in implementation of the Corporate Value Up Program