After months of political limbo, South Korean capital markets are brimming with anticipation as Tuesday’s presidential election ushered in a new leadership and an end to a prolonged policy vacuum.

While Lee Jae-myung, the candidate of the liberal Democratic Party of Korea, and his conservative rival differed in the specifics of their market-boosting pledges, both emphasized the need to resolve the persistent “Korea discount” that has long weighed on valuations.

Lee was projected to win the election according to Tuesday's exit polls.

Market watchers expected a Lee victory — along with broader investor optimism — to fuel a postelection rebound.

Investor sentiment points to a gradual Kospi recovery, with the index likely to test 2,800 in the second half — a level not seen since July 2024.

“Expectations for economic stimulus are likely to strengthen after the election, and a shift from policy vacuum to active support could drive a stronger won and foreign buying,” said Daishin Securities analyst Lee Kyoung-min.

However, he flagged a potential short-term pullback as the market digests preelection gains. The Kospi broke above 2,700 last week for the first time in nine months on hopes for political clarity.

While forecasting a near-term trading band of 2,550 to 2,800, the Daishin analyst reaffirmed his year-end target of 3,000 points, expressing confidence that improved fundamentals under the new administration could ultimately push the market to that level.

Other brokerages have also raised their targets, with wider bands reflecting increased volatility. Korea Investment & Securities projects a 2,400-2,900 range, expecting third-quarter consolidation followed by a gradual fourth-quarter uptrend. NH Investment & Securities sees 2,350-3,000, while Shinhan Securities targets 2,550-2,780.

Historical precedent supports the optimism.

Eugene Investment’s Huh Jae-hwan, analyzing nine presidential elections since 1981, found the Kospi gained after six. Huh noted that, on average, the index rose 3 to 4 percent in the first month and 14 to 16 percent over the year, typically driven more by easing political uncertainty than specific policy pledges.

Analysts emphasized that the Kospi’s sustained growth will hinge on foreign investor flows, particularly if the won continues to strengthen.

“A move above 2,600 will need renewed foreign inflows to maintain momentum,” said Noh Dong-kil of Shinhan Securities, calling foreign investment the key driver of a second-half rally.

Foreign investors had been net sellers for nine straight months since August, offloading 15.4 trillion won ($11.2 billion). That sell-off dragged the Kospi from a near-2,900 peak last July to as low as 2,300.

Sentiment rebounded in May as easing US tariff fears and signs of political clarity prompted foreign investors to buy 1.2 trillion won over the month, followed by an additional 240 billion won purchase Monday.

The key driver, analysts say, is currency.

“Foreign inflows are closely tied to dollar moves,” said Kim Soo-yeon of Hanwha Investment & Securities, noting that foreigners typically turned to net buyers about a month before the won strengthened.

After spending much of the year weaker than 2024 levels, and briefly approaching 1,500 won per dollar, the currency slipped to 1,369 won on May 26, its first dip below last year’s mark. It has since stabilized in the high-1,300 range.

Daishin's Lee expects further gains. “Anticipation of stimulus and industrial policies should lift demand confidence and add upward pressure on the won,” he said, projecting the won to enter the low 1,300s against the greenback by the third quarter.

Still, much will depend on how swiftly the new administration delivers.

Lee of the left-leaning Democratic Party of Korea has pledged to usher in a “Kospi 5,000 era” by strengthening minority shareholder protections. He calls for overhauling the Commercial Act to improve corporate governance, proposing codified fiduciary duties, expanded cumulative voting and safeguards against spinoff listings.

To bolster market integrity, Lee proposed to permanently ban those convicted of stock manipulation, along with stronger real-time surveillance and stricter clawback rules on short-swing profits.

He also reaffirmed Korea’s push for inclusion in Morgan Stanley Capital International's developed markets index, a key step toward boosting global investor confidence and attracting foreign capital.

Conservative candidate Kim Moon-soo of the People Power Party largely echoed the previous administration’s market-friendly stance, proposing expanded investor tax benefits and greater presidential engagement with markets.

In contrast to Lee, Kim opposed tackling corporate governance reform through amendments to the Commercial Act, instead advocating revisions to the Capital Markets Act, focused solely on strengthening shareholder protections for listed firms.

In the cryptocurrency space, the two candidates had struck rare common ground.

Both backed the launch of spot crypto exchange-traded funds — a key industry demand, with Korea trailing behind markets like the US and Hong Kong where such trading is already active.

While both candidates supported establishing a regulatory framework for emerging digital assets, such as stablecoins and security token offerings, Lee outlined more detailed blueprints, including proposals for stablecoin issuance and distribution, as well as plans to advance STO trading.

Separately, Lee emphasized structural reform, calling for centralized oversight and lower transaction fees in crypto markets.

Risks remain, as uncertainty over global trade and Korea’s weak growth outlook could temper capital markets' recovery.

Korea’s export-reliant economy remains exposed to US tariff hikes, with a bilateral deal expected in early July. Until then, outbound shipment prospects remain murky, adding pressure to an economy forecast to grow less than 1 percent this year.

“(US President Donald) Trump is likely to continue tariff threats, currency talk and trade renegotiations while pushing tax cuts and deregulation,” said Na Jeong-hwan of NH Investment & Securities. Markets may grow numb to tariff headlines, he added, but US political risks could intensify into September.

Still, with local markets significantly undervalued, Korea’s domestic outlook offers room for optimism. “As long as local markets follow US trends, expectations for fiscal and monetary stimulus under new leadership, coupled with structural reforms, should help lift the Kospi,” Na said.

By Choi Ji-won (jwc@heraldcorp.com)