Morningstar Favors Korean Stocks Over Chinese and Japanese Equities for Best EM Returns

A Morningstar Wealth fund manager is betting on South Korea's stocks to provide the best returns in emerging and Asian markets over the next decade. The manager sees technology stocks tied to the AI boom and government reforms as key draws. Despite US tariffs, the manager is optimistic about a possible agreement and expects annual returns of 11%-12% in dollar terms.

A Morningstar Wealth fund manager has positioned South Korea as the top pick for emerging and Asian markets over the next decade, driven by the potential of technology stocks tied to the artificial intelligence (AI) boom and government reforms. Despite the recent imposition of US tariffs, the manager remains optimistic about a potential agreement and expects annual returns of 11%-12% in dollar terms over the next ten years.

The benchmark Kospi index has surged 30% year-to-date, making it one of the world’s top performers in 2025. This strong performance is attributed to the election of President Lee Jae Myung, who has intensified efforts to improve corporate governance standards and raise equity valuations. Global funds have poured about $3 billion into Korean equities in May and June, reflecting investor confidence in the country's market potential [2].

South Korea’s key draws, according to Morningstar Wealth senior portfolio manager Mark Preskett, include technology stocks tied to the AI boom and a newfound political will for corporate reforms. He is particularly bullish on SK Hynix Inc. and Samsung Electronics Co., which are makers of high-bandwidth memory chips crucial for AI. These companies are seen as undervalued by Preskett [2].

The fund manager is unfazed by US President Donald Trump’s announcement of a 25% tariff on Korean imports, citing a base case for an agreement to be signed within the next two weeks. Additionally, the lack of escalation on existing tariffs on autos and the exemption of electronics and pharmaceuticals are seen as positive developments [2].

Preskett is encouraged by the government’s drive to codify corporate governance reform with its "Value-Up" program and legal changes approved by parliament last week, which will help alleviate concerns about minority shareholder rights and the dominance of family-run chaebols. These changes are making the market more attractive, particularly relative to China [2].

Over the past five years, the iShares Core MSCI Emerging Markets ETF (IEMG) has gained just under 33%, with South Korea contributing significantly to this performance. However, over longer periods, the differences between IEMG and VWO tend to even out [1].

Despite the optimism, risks remain, including potential resistance from controlling shareholders to deeper reforms and concerns about market volatility due to political turmoil. Recent market volatility, including a 13% slump in the Kospi in April due to political turmoil and Trump’s tariffs, is still fresh in investors’ minds [2].

In conclusion, Morningstar Wealth's bet on South Korea is based on a combination of strong fundamentals, technological advancements, and government reforms. While risks exist, the manager’s outlook on annual returns of 11%-12% in dollar terms over the next decade is driven by the country’s potential to revalue its stocks and attract global investment.

References:
[1] https://www.etf.com/sections/features/south-korea-powers-surge-emerging-markets-etf-flows
[2] https://www.bloomberg.com/news/articles/2025-07-08/morningstar-says-korean-stocks-are-em-s-best-bet-despite-tariffs