Looking ahead at 2026 stock market

As we close out one of the most eventful years on record, the Korean stock market’s historic performance begs the question: How sustainable is this outperformance? Earlier this month, the Korean government lowered the dividend income tax from the high-end bracket of 49 to 25 percent. This move is the first step to ushering in a dividend culture and encouraging Korean retail investors to embrace a long-term buy-and-hold investment approach. Last year, I identified three fundamental shifts that led to my call for a KOSPI rally driven by an unprecedented market reform initiative.

First, U.S. President Donald Trump's tariff war has heightened Koreans' sense of urgency for unity against external pressures; having its exporters threatened would force Koreans to prioritize economic growth over the social agenda.

Second, for the Korean government, the stock market has become the second most visible barometer of public wealth creation and financial well-being (after the residential property market), as the number of brokerage accounts held by Koreans surpasses historical levels.

Third, Korean conglomerates are undergoing generational leadership change and, due to a punitive inheritance tax and political scrutiny, have to secure support from shareholders who are gathering behind the global activism trend. The final point is a critical factor that global investors have been calling for decades, often cited as the key reason behind the fabled “Korean Discount.”

The Korean equity market has been weighed down by structural impediments to sustained valuation expansion for decades. The most commonly blamed reasons include the cyclicality of Korean companies, a weak financial system and even North Korea risk; but by far the biggest culprit has been poor corporate governance and a lack of care for minority shareholder rights. It is, however, an oversimplification to assume corporate governance issues come down to dividends alone. Rather, the cause leading to the lack of dividends must be addressed: the lack of a long-term investment culture.

These features have led to the Korean stock market being one of the most volatile in the world. President Lee Jae Myung's call for Koreans to embrace dividends as a mainstream form of income is, in essence, a campaign to move Korean retail investors away from short-term trading. Investor confidence in market reform will be strengthened by the alignment of interests among three key stakeholders: Korean policymakers, the Korean public and investors.

Korea’s investment culture, dominated by short-term trading and speculative themes, applies not only to investments but also to its companies, as their pursuit of a relentless (and often cyclical and speculative) growth strategy is at the root of the "Korean Discount." Traditionally, the KOSPI has been known for high-beta features, attributed to cyclical companies and their leveraged balance sheets. There are countless cases of Korean companies taking “high risk, high reward” bets that have turned them into a shining national champion. An aggressive foray into industrial sectors like shipbuilding and chemicals at a time when other global peers are on the defensive has been a well-known trait of Korea’s national champions. However, for many shareholders, such a strategy is often considered a reckless pursuit of growth at the expense of overall shareholder returns. During the first few weeks of Lee’s term, the fiduciary duty of the Korean companies’ management board was changed from “company” to “overall shareholders,” signalling a seismic shift for shareholder rights.

With Korea facing multiple challenges in the coming decades, including a rapidly shrinking population, intensifying export competition and rising geopolitical risks, the cyclically aggressive growth strategy is an outdated model. Korea’s main engine of growth, exports, is being disrupted by China’s onslaught that mimics the success of Korea Inc., except on a much bigger scale.

Another challenge for the Korean economy is the waning wealth creation from domestic residential property. Lee's party has called for an end to speculative fervour in the property market, citing concerns over household debt, which is among the highest in the world. As the country approaches a demographic cliff in the coming years, Korean households will need to manage a soft landing, transitioning from highly concentrated property ownership to more diversified financial portfolios.

Unfortunately for domestic asset managers, easier access to overseas markets is contributing to a hollowing out of the domestic financial market, where Koreans’ obsession with growth themes and momentum trading is benefiting the U.S. stock market. Within a few years, Korean retail investors have become some of the biggest players in U.S. growth stocks such as Nvidia, Tesla and now Palantir.

Interestingly, the Korean stock market’s spectacular rally this year has not prompted retail investors to shift from U.S. to local stocks. With the Lee administration recognizing the potential impact of retail fund flows, this year’s rally in Korean equities could offer a preview of further upside in the KOSPI if domestic investors return to the home market.

I have pointed to the dangers of focusing too much on the KOSPI 5000 target; greater importance should be placed on achieving a long-term rerating with lower cyclicality. The absence of a long-term investment culture and unrealistic investment return expectations are being addressed for the first time through changes to tax policy and laws related to the fiduciary duty of Korean corporate management. The year 2026 should see further progress of structural reform, which will ensure that this year’s stellar performance will not be another false dawn for stock investors.

Peter S. Kim is a managing director at KB Securities.