Are investors underestimating the emerging markets reform story?

One of the most underappreciated changes across some emerging markets over the past decade has been the strengthening of policy frameworks and market institutions.

While headlines often focus on episodic crises or geopolitical risks, these reforms materially alter how several of these economies respond to shocks and generate growth. This evolution matters for investors because it reshapes both risk dynamics and long-term return potential.

From fragile to more stable: the macro transformation

Macroeconomic policymaking in many emerging economies today bears little resemblance to that of earlier cycles.

Central banks have become more independent, more credible and more transparent. Inflation-focused regimes are now firmly established across much of the universe. The result, in some cases, has been lower inflation volatility and fewer balance-of-payments crises. Temporary shocks are also less likely to morph into systemic events.

Fiscal policy has also matured, even if challenges remain. Many emerging markets have adopted clearer fiscal frameworks and institutional constraints designed to improve discipline and predictability.

Debt levels in some emerging market countries rose following the pandemic. Yet the broader shift toward transparency and rules-based policymaking has improved investor confidence.

The fiscal prudence of some emerging markets, particularly those scarred by the Asian Financial Crisis of the late 1990s, now stands in stark contrast to most developed markets, many of which are struggling with mounting levels of debt.

Alongside these macro improvements, financial systems have become more resilient. The development of tools to safeguard against financial instability has reduced the vulnerabilities that historically amplified downturns in emerging markets. Domestic banking systems are generally better capitalised, and reliance on short-term foreign currency funding has broadly declined.

Beyond macroeconomic stability, structural reforms have started to improve the functioning of markets themselves.

Reforms aimed at improving corporate governance and minority shareholder protection are gaining ground. So too are efforts to broaden and deepen capital markets. Together, these represent a fundamental shift in some emerging markets.

For long-term investors, the case is strengthening: emerging markets are no longer a basket of basket cases. Many are increasingly able to sustain growth through changing global conditions.

Case study: South Korea

For decades, Korean companies struggled to turn business growth into shareholder returns, and their shares traded at a persistent ‘Korea discount’ to global peers.

Weak governance, limited protection for minority shareholders, and tax policies that discouraged long-term ownership undermined confidence.

Domestic savers favoured property over equities, while global investors often treated Korea as a one-stock market. By 2024, capital outflows from Korea into the US, had become politically salient, and policymakers responded with a state-backed push to “Value-up” Korean companies.

The goal was straightforward: improve capital discipline and reward shareholders more consistently. Early progress was visible, especially in the banking sector, but voluntary participation and weak enforcement limited the programme’s impact.

As a result, broader capital market reform became a central issue in the 2025 presidential election. The new administration promised stronger minority shareholder protections and tax reforms to support equity investment. It also set out a vision of a “Kospi 5000” era, the country’s main index surpassing the 5,000 mark. That milestone has since been surpassed in January 2026.

Parliament has since amended the Commercial Act multiple times. These are the laws that govern Korean businesses. Company managers now owe a fiduciary duty to shareholders, not just to the firm itself.

While uncertainty remains around execution, fiscal priorities, and trade policy, the direction of reform has improved sentiment. Importantly, these developments have created fertile ground for bottom-up investors willing to look beyond benchmarks and consensus views.

Where reforms meet shareholder returns

It has been encouraging to see these reforms already translating into cash returns for shareholders. KB Financial, the parent of Korea’s largest bank, has scaled back overseas acquisitions and returned capital instead. In response, its share price has more than doubled since the start of 2024.

Even Samsung Electronics, long resistant to shareholder pressure, announced a ₩10 trillion buyback (approx. US$7 billion) to support its valuation.

Against this backdrop, there remain plenty of company-level opportunities to be excited about. Kiwoom Securities is a case in point. As Korea’s leading online broker, it has captured more than 30% of retail equity inflows in recent years while generating returns on equity of around 18%, despite intense competition.

Yet until recently, its shares have long traded near or below book value. Improved market sentiment, increased trading activity, stronger capital allocation, and potential tax reforms could enhance shareholder returns and valuations.

Similar dynamics apply to several other Korean companies, where strong businesses trade at deep discounts due to governance concerns rather than weak fundamentals.

Korea’s reform journey is still at an early stage, and setbacks are likely. Yet the pressure for change continues to rise.

For investors focused on fundamentals, Korea offers a compelling case where discounted valuations, improving capital discipline, and potential structural reform combine to tilt long-term risk-reward in their favour.

Disclaimer

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