Goldman's Kwon: Integrating Korea's 2026 Bullish Case into EM Portfolio Allocation

The institutional setup for emerging markets is now clearly bullish. Goldman Sachs Research forecasts the MSCI EM index to reach 1,480 over the next 12 months, a projection that implies an 8% price return from current levels. This rally is underpinned by a durable combination of strong company earnings and supportive capital flows, with the firm noting the EM equity rally can extend into the year-end as macro trends remain favorable. The broader global growth backdrop is also constructive, with Goldman economists forecasting sturdy global growth of 2.8% in 2026, a step up from the consensus, where the US is expected to lead.

Within this supportive EM equity environment, South Korea stands out as a top performer with a compelling risk-adjusted profile. The country's benchmark Kospi index is positioned for a powerful earnings rebound, with Goldman forecasting EPS growth to rebound to 54% in 2024 and to grow 20% further in 2025. This makes Korea the anticipated leader in earnings acceleration across the Asia-Pacific region. The investment thesis here is structural: the market trades at a notable discount, with the Kospi's price-to-book ratio at 0.92, suggesting significant room for re-rating if growth materializes as projected.

For portfolio construction, this creates a clear overweight opportunity. Korea offers a concentrated bet on a key driver of the EM rally-technology and AI-related demand-while sitting on a valuation discount that can enhance returns. In a year where the US leads global growth but diversification remains key, Korea's projected earnings surge provides a high-conviction, quality factor play within the EM equity basket. The institutional flow is already aligning, with strong foreign buying fueling the current rally. The setup is for a sustained move higher in EM equities, and Korea is positioned to be a primary beneficiary.

The Korea Discount and Sector Conviction

The institutional case for Korea rests on a clear mispricing and a targeted industrial strategy. The market trades at a notable discount, with the Kospi's price-to-book ratio at 0.92 and a P/E of 18.93. This "Korea discount" is the core of the opportunity, suggesting significant room for re-rating if the projected earnings acceleration materializes. For a portfolio, this means a quality factor play at a bargain price.

The conviction is anchored in a specific sector: semiconductors. The government has declared cementing Korea's global semiconductor leadership a top priority, framing it as a cornerstone of the 2026 recovery and a longer-term agenda toward 2045. This policy tailwind is structural, aiming to become the world's second-largest player by strengthening both manufacturing and design. The institutional flow is already aligning with this narrative, as the market has been one of the top performers in Asia this year.

A key near-term catalyst could be the lifting of the short-selling ban. Authorities banned the practice in early November, and historically, post a short-selling ban, KOSPI has performed strongly by at least 10% over the following 6 months. With the ban now lifted, this potential liquidity and sentiment boost adds a tactical layer to the fundamental thesis. The setup is for a re-rating driven by sector-specific growth and policy support, with a clear catalyst to unlock value.

Portfolio Construction: How to Allocate

The institutional case for Korea translates directly into a concrete allocation decision: overweight within a diversified emerging markets portfolio. This is not a tactical trade but a strategic bet on a high-conviction, quality factor play. The setup offers a compelling risk-adjusted return profile, combining projected double-digit earnings growth with a significant valuation discount.

Capital allocation should be directed toward the quality factor, specifically export-oriented, capital-intensive firms at the heart of Korea's industrial strategy. The semiconductor sector is the primary engine, with the government's declared priority to become the world's second-largest player providing a durable structural tailwind. Defense is a secondary, high-conviction area, offering a hedge against geopolitical risks given Korea's status as a major global weapons supplier. For portfolio construction, this means favoring firms with strong profit growth expectations in these targeted industries.

A critical liquidity catalyst to monitor is the implementation of capital markets reforms. The government's growth strategy includes a push to channel household and institutional savings into productive investment, with a key initiative being the incorporation of the secondary Kosdaq index into pension fund performance benchmarks. The weighting for this benchmark is set to be announced imminently. This move has the potential to unlock a significant, long-term source of institutional flow into smaller-cap, growth-oriented companies, complementing the existing foreign buying that has fueled the rally. The bottom line is that the portfolio should be built on the earnings and valuation thesis, with a watchful eye on these policy-driven liquidity enhancements as they materialize.

Catalysts and Risk Management

For portfolio managers, the institutional thesis hinges on a few clear catalysts and a defined set of risks. The primary validation event is sustained semiconductor pricing strength. The government's 2026 economic growth strategy explicitly frames a recovery in global demand for semiconductors as a cornerstone of its forecast, which projects 2% growth. This target is narrow and externally dependent; without continued strength in chip prices, the earnings re-rating and export resilience that underpin the market's discount could falter. Monitoring quarterly earnings from major chipmakers and global inventory data will be critical to confirm this tailwind remains intact.

The key risk that could derail the setup is a resurgence of US trade tensions. The current baseline assumes a subdued tariff environment, which Goldman Sachs recently noted contributed to a revised growth forecast of 1.1% for South Korea. A shift in US policy would directly threaten Korea's export-led model and could trigger financial volatility, undermining the stable conditions required for the growth strategy to work. This is a material, external shock that is not fully stress-tested in the official plan.

A specific watchlist item for liquidity signals is the government's announcement of the pension fund weighting for the secondary Kosdaq index. This move, set to be announced imminently, is a concrete step to channel long-term institutional capital into smaller-cap, growth-oriented firms. Its magnitude will serve as a direct signal of the government's commitment to improving market liquidity and supporting the venture ecosystem, complementing the existing foreign buying. A favorable weighting could unlock a new, stable flow of capital, while a lukewarm response would indicate policy execution may be slower than hoped.

The bottom line is that the Korea thesis is a high-conviction, quality play on a specific industrial cycle and policy tailwind. It demands active monitoring of semiconductor markets and geopolitical developments, while also watching for concrete policy actions that can enhance the market's structural liquidity.