Over the past 15 years since the Global Financial Crisis, the United States Dollar (USD) has strengthened significantly, particularly against emerging market currencies, leading to widespread undervaluation compared to historical averages. Many 2025 market outlooks anticipated further USD gains, driven by so-called Trump Trades, with investors expecting sectors that benefit from tax cuts, deregulation, and protectionism to outperform.

However, these market forecasts were soon proven wrong as Trump’s erratic policies regarding tariffs has resulted in the weakening of the USD this year, giving rise to doubts about its continued long-term strength. At MCP, we believe the undervaluation of EM currencies compared to the USD presents attractive opportunities for investors.

What Does EM Currency Undervaluation Mean for Investors?

EM currency undervaluation provides key investment opportunities to capitalise on additional sources of alpha when the currencies re-rate and gain ground; a trend that has gained momentum this year. Brazil is a key example – the Brazilian Real (BRL) has appreciated 10% against the USD YTD as of the 31 July – a welcome contrast to the BRL’s 27% depreciation in 2024. Key drivers behind the Real’s appreciation include improving fiscal conditions, positive economic data, and successive hikes in its benchmark interest rate (the Selic), which currently stands at 15%, helping to stabilise inflation expectations.

While currencies can present opportunities for additional sources of alpha, we are conscious that they can also become significant detractor to returns. That is why currency risk will always remain a key consideration in our vigorous macro-overlays. Additionally, while we do not invest based solely on currency attractiveness, it can contribute to the broader investment case for a high-quality, attractively valued stock.

In countries with more vulnerable currencies, we mitigate risk by focusing on companies with diversified currency exposure. We particularly favour exporters generating revenue in hard currencies. For example, CI&T is a software company based in Brazil which caters to the US market, generating more revenue in USD than in real, while in Turkey, Hitit, an airline and travel IT Solution provider, generates 65% of its revenues in USD and 13% in EUR.  

So how undervalued are EM currencies?

There are several factors suggesting that that emerging market currencies may be due for a reversal in their long-standing depreciation trend, a view increasingly supported by foreign exchange movements this year.

Firstly, the USD ended 2024 at two standard deviations above its 50-year average. Given the cyclical nature of currency markets, this suggests limited room for further appreciation[1]. In 2025 so far, the dollar has already retreated from its post-election highs, as market sentiment has turned increasingly negative towards Trump’s policies, fuelling concerns about a revival in inflation. This, coupled with an increasing fiscal deficit and mounting federal debt, has caused investor confidence in the US economy to decline.

USD Spot Index YTD

The long-standing narrative of ‘American Exceptionalism’ that has driven US equity market dominance in recent years is beginning to unwind. In response, capital is increasingly shifting toward more globally diversified asset classes. Notably, emerging market portfolio inflows reached $42.8 bn in June according to data from the Institute of International Finance.

Should Trump’s erratic and inflationary policies continue, this erosion of trust in US institutions could become more permanent. Signs of this shift are already emerging, demonstrated by Moody’s downgrade of the US credit rating from AAA to Aa1 due to concerns around US debt.

EM Debt has Remained Steady This Decade Compared to Soaring US Debt

Many Emerging Markets Have Healthier Debt-to-GDP Ratios than the US

Globally, countries appear to want to move in only one direction: away from economic dependence on the US, including reducing their reliance on the US dollar. This is evident in the growing efforts of many countries to settle a larger share of their trade in domestic currencies. For example, in 2022 the Reserve Bank of India set up a trade mechanism to facilitate bilateral trade in Indian Rupee.

Adding further support to potential EM currency appreciations, global interest rates are on a downward trajectory. Although Trump’s policies may slow the pace of Fed rate cuts—despite his clear preference for looser monetary policy—the structural trend remains intact. Historically, a declining rate environment has supported EM currencies, given their inverse correlation with the USD. Lower US rates reduce the burden of dollar-denominated debt, easing external financing conditions for emerging markets.

Meanwhile, if EMs manage their own inflation effectively and maintain credible monetary policies, their currencies should strengthen as investor confidence shifts toward higher-yielding and well-managed EM economies. Notably, some of the strongest EM currency performers this year include the Brazilian real, Taiwanese dollar, South Korean won, and Malaysian ringgit.

We do not expect EM currency appreciation to occur uniformly across all EMs as each is shaped by its own unique mix of internal and external pressures. However, in cases where currencies do appreciate—especially those supported by strong structural reforms and credible institutions—the outcome can be meaningful alpha generation, as illustrated by Brazil this year.

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[1] JP Morgan

Last February, we published an article outlining South Korea’s newly announced Value Up Program introduced by the Financial Services Commission (FSC) together with the Korea Exchange (KRX). The program was designed to tackle the ‘Korea Discount’, whereby Korean equities trade at significantly lower valuations than to their global counterparts.

At the time of writing, the program’s specifics were limited. It was understood that it would comprise a set of voluntary guidelines encouraging companies to devise mid- to long-term targets to increase shareholder value. Companies participating in the program would receive substantial financial incentives. In addition, companies with a proven track record of profitability or those that were expected to boost valuations would be included in the upcoming Korea Value-up Index, with ETFs tracking the Index to be launched in Q4 2024. In fact, all four of our Korean holdings have been included in the Index.

Despite the program’s ambitious aims, initial reactions were cautious, with concerns raised about the lack of detail, particularly regarding the unspecified tax incentives that the FSC emphasised as a key reason to participate. In response, the FSC promised to release more concrete guidelines by June 2024.

A year on from the program’s launch, we believe it is timely to revisit the initiative to shed light on the more detailed framework that has since been released and to offer an assessment of its early successes and failures.

What Further Details Have Been Released?

The Corporate Value Up Program:

In May 2024, the FSC released their guidelines for the Value Up Program, which were published in full on their website in August. The guidelines recommend that companies’ Value Up plans include information from six key categories.

1. Company overview

Corporate information should be specified to provide a comprehensive description of the company, including business sectors, major products and services and company history.

2. Current status analysis:

Companies should disclose the most relevant financial indicators for medium- to long-term value improvement specific to their industry. These may include price-to-book ratio (PBR), price-to-earnings ratio (PER), return on equity (ROE), return on invested capital (ROIC), dividend payout ratio, shareholder return ratio, revenue growth, and so on. In addition, non-financial indicators, most significantly those related to corporate governance, are encouraged to be disclosed.

3. Goal setting:

Companies should set goals for improving their disclosed metrics to enhance corporate value in the medium- to long-term. These goals may include expanding R&D, investing in human and physical resources, efforts to increase shareholder returns, such as the cancellation of treasury stocks, and so on.

4. Planning:

Detailed plans should be submitted regarding how these goals will be achieved. 

5. Implementation evaluation:

It is recommended that plans are submitted once a year, alongside a review of the previous year’s achievements.

6. Communication:

Companies should submit a report on the status, plans and performance of their communication, including quantitative methods for promoting effective communication, such as English translations of their Value Up plan.

The KRX commenced its first Corporate Value-up Award Program on 27 May, recognising and awarding companies with notable value-up achievements. In a prior press release the FSC stated that awarded companies will be eligible to receive (a) an exemption from the external auditor designation requirement, (b) a mitigation in penalties resulting from an audit review, (c) an exemption from KRX listing fees and annual dues, (d) an exemption from fees related to making changes to KRX listing status, and (e) a six-month postponement of sanctions resulting from dishonest disclosure.

The KRX plans to provide a range of services to support companies’ voluntary disclosures. These services will include disclosure-related training, providing information on the program to internal and external company directors, and offering one-to-one consulting services to support small and medium-sized businesses that may lack the human resources and physical infrastructure to develop and disclose their Value-up Plans independently. According to the KRX, it provided this consultation service to 55 companies in 2024, including nine from the KOSPI and 46 from the smaller KOSDAQ Index. The KRX plans to increase the number of consultations in 2025, offering the service to 50 KOSPI and 70 KOSDAQ companies. Priority will be given to companies that plan to participate in the Value Up Program.

The Korea Value Up Index:

Details of the Korea Value-up Index were released in September 2024, with ETFs tracking the index becoming live in December. The index comprises 105 companies listed on the KOSPI or the KOSDAQ, with the majority listed on the former. The Index is intended to serve as a benchmark for pension funds and institutional investors to help them identify companies with higher shareholder value.

Selection for the Index is based on criteria such as profitability and shareholder return, including dividends, share buybacks, price-to-book ratio and return on equity. Moreover, the KRX has adopted a relative evaluation method in order to account for differences across industry characteristics thereby ensuring sectorial balance.

The Korea Exchange announced the first rebalance of the Index on 27 May 2025, adding 27 new stocks and removing 32. Changes reflect the preferential inclusion of companies actively disclosing Value-Up plans and the removal of those that have undertaken actions which may have harmed shareholder value or are not in line with the policies of the Value Up Program. The actual rebalancing was implemented on 13 June. We are pleased to announce that all four of our Korean holdings have retained their place on the Index, reflecting their commitment to high shareholder return and strong corporate governance in line with the goals of the Value Up Program.

What are the Program’s Early Successes?

So, what—if anything—has the Value Up Program achieved in its first year? According to the FSC and the KRX, 125 companies had officially disclosed their Value Up Plans by the end of March 2025. While this represents only 5.1% of all listed firms on the KOSPI and KOSDAQ, these companies together account for 46.1% of total market capitalisation[1]. The Korean business news outlet, Chosun Biz, reported that, encouragingly, between the second quarter of 2024 and the first quarter of 2025, listed companies repurchased 22.88 trillion won worth of shares, a 2.4x YoY increase. Stock cancellations reached 19.59 trillion won, up 2.3x YoY, while cash dividends rose by 11% to a total of 48.35 trillion won. These developments suggest that early adoption of the program may already have translated into tangible changes in corporate behaviour.

Although the number of participating companies remains relatively low, momentum is said to be building as major Korean conglomerates, known as ‘chaebols’, begin to show increased interest. Hyundai Motor has already announced new targets for total shareholder return and share buybacks as part of its commitment to the initiative. LG and Posco are expected to join the program too. The Financial Times reported Jeong Eun-bo’s, Chief Executive of the KRX, argument that once Korea’s largest companies join the program, over time, it will encourage other companies to join due to Korea’s strong naming and shaming culture.

Additionally, Kim Byoung-hwan, Chairman of the FSC, has stressed that the program’s effectiveness should be evaluated in the long-term, acknowledging that shifts in corporate culture, particularly those involving governance and capital allocation, are always gradual. We share this view: the Value Up Program is a long-term structural reform initiative, designed with a decades-long horizon in mind. Japan’s own corporate reform efforts, which started over a decade ago and have only recently begun to bear fruit, demonstrate that such deep-rooted changes require a long-term strategy and perspective.

What are the Program’s Early Shortcomings?

The main criticism of the program is that it is voluntary. While 125 companies have joined, some argue that this figure is underwhelming. Whether this level of participation is significant or not ultimately depends on one’s perspective, but it is clear that the number would be higher with more enforceable guidelines or legislative obligations. Given the seriousness of the ‘Korea discount’, including the fact that the National Pension Fund is projected to be depleted by the 2050s due in part to the low valuation and growth of domestic stocks, the program’s non-compulsory nature seems misaligned with the scale of the problem. From this standpoint, many argue that the program should be mandatory to ensure companies are held accountable for delivering shareholder value and improving market efficiency.

Critics also highlight that the program falls short of addressing deep-rooted structural issues in Korea’s corporate environment. With inheritance tax rates as high as 50–60%, families are incentivised to suppress corporate valuations to mitigate future tax burdens on the next generation. Furthermore, the program does not prevent the opaque and complex cross-holding structures that many large Korean conglomerates rely on to maintain majority control, which in turn allow the interests of minority shareholders to be disregarded. Therefore, even if the program raises valuations to some extent, it is not until the conflicts of interests between the large corporations’ self-interests verses boosting shareholder value are aligned that the ‘Korea discount’ can truly be tackled for good.

What is the Future of the Program?

As it stands, the FSC has no plans to transition the initiative from a voluntary framework to an enforced one. This means that the program’s long-term success will depend on whether more companies choose to participate willingly. In turn, this will likely require additional regulatory activity and structural reforms to overcome entrenched disincentives.

The direction of the program may be significantly influenced by political developments. Following the impeachment of President Yoon Suk Yeol, resulting from his failed attempt to impose martial law, early elections were held on 3 June 2025 with Lee Jae-myung of the Democratic Korea Party (DKP) winning the election.

Lee has publicly committed to addressing abuses by controlling shareholders and promoting better governance in support of the Value Up Program. Notably, in March 2025, the DKP succeeded in pushing through a revision to the Commercial Act, aimed at expanding the fiduciary duties of board members. The revised law would require directors not only to act in the company’s interest but also to protect minority shareholders and promote board independence. However, the PPP under acting president Han Duck-soo vetoed the amendment on the basis of over regulation. While this has blocked the amendment, the DKP’s clear willingness to push through such reforms demonstrates a strong commitment to structural change and addressing corporate governance issues. Furthermore, with the DKP now in power, the legislation could be revived.

By following the regulations the new government prioritises during their initial period in office, we will soon have a better idea of the future of the Value Up Program. We will continue to closely monitor these developments, as well as any other relevant regulatory changes within Korea’s political landscape. Nevertheless, we believe that the Value Up Program is an important starting point for the country’s development towards higher valuations and better corporate governance. At the very least, the program has sparked conversations and drawn attention to these structural issues, which require the attention of both the corporate and political leaders of Korea for the long-term health of the country and its market.

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[1] Chosun Biz

Since its official founding on 15 August 1948, South Korea has achieved remarkable economic success, combined with a turbulent journey towards democracy. The first 30 years of the nation’s history were dominated by authoritarian rule, with martial law frequently employed to maintain dictatorial control. It was not until 1987 that a democratic system was firmly established. Since then, the country has maintained a stable democracy, free from military coups and widely regarded as one of the most democratic countries in the region over the recent decades despite its young age.

However, that perception changed dramatically on 3 December 2024 when President Yoon Suk Yeol declared martial law on the grounds of protecting the country from “anti-state” forces sympathetic to North Korea.  This caused international alarm around the state of the country’s democracy. South Korea’s standing in global democracy rankings declined sharply. For example, in the Economist Intelligence Unit’s Democracy Index 2024, the country fell to 32nd out of 167, down from 22nd in 2022.

However, we believe that the swift institutional response to this crisis, paradoxically, reaffirms the strength of South Korea’s democratic framework. The National Assembly acted quickly, suspending Yoon from office and initiating impeachment proceedings. On 14 December, Yoon was formally impeached and stripped of his presidential powers. Yoon was then arrested on 15 January 2025, following a failed attempt on 3 January 2025 as forces withdrew due to concerns for the safety of their personnel following resistance from pro-Yoon demonstrators and a military unit defending Yoon.

On 4 April, the Constitutional Court unanimously upheld the impeachment, officially ending Yoon’s presidency. A snap presidential election has been scheduled for 3 June, with several politicians having served as acting president in the interim period, including Han Duck-soo, Choi San-mok, and currently Lee Ju-ho.

So what are the implications of this impeachment crisis for South Korean democracy?

Despite the initial shock of martial law, the nation’s swift return to constitutional order is a testament to the fact that its institutional processes are capable of defending its democracy in the face of an extreme threat. The impeachment and lawful arrest of a sitting president sends a clear message that abuses of power will not be tolerated, and that the country’s institutional checks and balances are robust and functional.

The next president will take office against the backdrop of this crisis, acutely aware of subsequent public dismay it caused demonstrated by millions of people taking to the streets of Seoul to peacefully protest for Yoon’s arrest over several months. These protests were witnessed first-hand by an MCP analyst during a research trip to Korea in February.

So that leads on to the question of who will be the next President?

Lee Jae-myung, the Democratic Party (DKP) presidential candidate, has been the leader of the centre-leftist party since 2022. He lost the 2022 general election to Yoon Suk Yeol only by a margin of 0.8%. Additionally, he played a significant role in the impeachment of Yoon. However, Lee himself is not free from controversy and is actually contesting criminal charges around alleged bribery linked to a $1bn property development scandal. Courts have agreed to push back further hearings until after the election.

Kim Moon-soo is the People Power Party (PPP) presidential candidate, the current right-wing ruling party. He served as the minister of employment and labour from 2024 to 2025. While Kim publicly disagreed with President Yoon’s decision to declare martial law, notably he refrained from joining other cabinet members in issuing a formal apology and he opposed Yoon’s impeachment. Kim has resultingly gained much support from Yoon loyalists but has struggled to broaden support beyond this group. In the Gallup Korea poll released on 16 May, Kim trailed significantly behind Lee who led with 51% support compared to Kim’s 29%.

Not only is this election set in the aftermath of the recent impeachment crisis, it is also taking place amid the current global tariff crisis. Korea was one of the first countries to hold official trade talks with the US. The new president will be responsible for continuing these crucial negotiations in an attempt to prevent a potential 25% tariff on Korean exports to the US. This measure could be implemented on 8 July, when the current 90-day pause expires, if no trade agreement has been reached.

Moreover, the tariff crisis is set to exacerbate the country’s existing economic problems, which include low growth and a rapidly ageing population. It is hoped that, once the leadership vacuum has been filled, the country will be better able to respond to its current economic problems.

The first televised debate between the leading candidates took place on 18 May and included Lee, Kim, Lee Jun-seok of the minor centrist Reform Party and Kwon Young-kook of the minor progressive Democratic Labor Party.

In terms of the economy, Lee said that the government should play a more active role in stimulating domestic demand and promoting growth in key sectors such as the high-tech and renewable energy. This would involve development a form of ‘sovereign AI’ – something he likened to a similar, but free version of ChatGPT for the nation.

He promised to work towards promptly implementing a supplementary budget to boost the domestic economy and benefit ordinary people, as well as providing greater protection for unionised workers and introducing a four-and-a-half-day working week.

Meanwhile, Kim promised to create jobs, deregulate by creating a government agency dedicated to innovating regulations, and to invest more than five percent of the budget in research and development to spur economic growth.

Regarding the U.S, Lee and Kim promised to take very different approaches, with Lee preferring to take time to hash out a trade deal with the US that will ensure Korea benefits. In contrast, Kim emphasised the importance of South Korea’s alliance with the U.S., and that he would seek to hold a summit with Trump as soon as taking office in order to accelerate trade negotiations.

Additionally, Lee has called for constitutional reform to allow a four-year, two-term presidency and a two-round system for presidential elections through a referendum, in contrast to the single five-year term president’s currently serve. He also vowed to curb the presidential right to declare martial law and to hold account those responsible for the 3 December declaration.

It is also worth pointing out that the DKP pushed through a revision of the Commercial Act in March which expands the fiduciary duty of board members to act not only in the interest of the company, but also to protect the interests of minority shareholders and improve board independence. However, the PPP under acting president Han Duck-soo vetoed the amendment on the basis of over regulation. More broadly, Lee has vowed to renew efforts in support of the Value Up Program in order to improve corporate governance and raise Korean valuations, despite this initially being an initiative under Yoon Suk Yeol’s presidency.

We will continue to monitor the ongoing political and economic developments in South Korea closely, assessing the impact of the next president’s policies on the country’s economy, its Value Up Program and our portfolio specifically. We believe that the new president must prioritise securing a favourable trade deal and restoring the international communities’ trust in the country’s democracy and institutional processes. Overall, we remain fundamentally confident in the country’s stability and its promising investment opportunities, particularly in the export market. For example, the chart below shows a significant increase in import and export traffic through Korea’s primary port, Busan, over the past decade.