South Korean stocks have been left out of the global market rally this year, but the market is back on investors' radars following new government policies to address the age-old issue of Korea Inc: the lack of dividends.
The benchmark KOSPI index has risen a meager 2.9 percent year to date, underperforming the 9.6 percent gain in global stocks, according to the MSCI World index.
In late-July, the Korean government announced that as part of a $40 billion economic stimulus package it would introduce a tax on companies with high cash reserves to encourage greater shareholder returns, increased capital investment and higher wages.
"A low dividend payout and the lack of focus on shareholders' returns are part of the reasons for Korea's much lower valuations compared to the region," Goldman strategists' led by Richard Tang wrote in a recent note.
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Heavyweights including Samsung Electronics, for example, have been reluctant to return more of its near $60 billion cash pile to shareholders, despite growing calls from investors.
"In our view, a hike in dividend payout may be a catalyst for re-rating the market," Tang said. Re-rating on a market means investors are willing to pay a higher price for shares.
Details of the dividend policies will be announced on August 6 and thereafter voted on in Congress, according to Goldman Sachs.
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The KOSPI's dividend payout ratio of 12 percent and dividend yield of 1.2 percent are the lowest in the region. By comparison, Taiwan and Hong Kong offer a dividend yield of 2.9 percent and 3.9 percent, respectively.
CIMB Securities has also turned upbeat on the prospects for what it calls the "forgotten market."
"We stand positive on the current government's efforts to stimulate the domestic economy and reform corporate governance in Korea," Dohoon Lee, strategist at CIMB wrote in a report.
"While corporate inertia and resistance are expected in the near-term, follow-up measures by the government should be a tailwind for investors' quest for income in Korea," he said.
If expectations for the dividend payout ratio - a percentage of earnings a company gives to shareholders in the form of dividends - are raised to 30 percent for 2016 – CIMB forecasts the KOSPI could reach over 2,500 by end-2015. This marks 20 plus percent upside from current levels.
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The bank singles out Hyundai Motor, Hyundai Mobis, KIA Motors, Hankook Tire, Hyundai E&C, Samsung Engineering, KB Financial Group and Shinhan Financial Group as the companies that have the highest upside to their potential dividend payout in 2015 and 2016.
Other factors that indicate the market may be poised to take off include the solid performance in Taiwan's market in the recent months– which is typically a lead indicator on Korea, according to strategists.
Taiwan's TAIEX – which has risen 6.5 percent so far this year – and Korea's KOSPI are both seen as markets that are more geared to global growth relative to their regional peers.