Fueled by the AI boom and expectations of corporate governance reforms, South Korea's benchmark Kospi index has surged over 66% this year, emerging as the world's top-performing major stock index and drawing global investor attention.
The Kospi has outperformed the S&P 500 by 49 percentage points this year - its widest margin in two decades. For most of the past three years, the index traded below book value (P/B ratio <1), indicating investors valued its components below their net assets.
Now, with foreign capital returning and AI boosting its largest companies (particularly chipmakers), investors are reassessing this market. Albert Saporta, CEO of GAM, notes: "This represents a comprehensive rerating of South Korean markets, which were extremely cheap before this rally."
Analysts attribute the bull run to three key drivers: AI-driven semiconductor demand, sweeping corporate governance reforms, and thriving exports from manufacturers in critical supply chains.
The AI Chip Boom The Kospi's rise owes much to its two heaviest-weighted stocks - Samsung Electronics and SK Hynix (combined 30% index weight). Samsung shares have jumped over 90% YTD, while SK Hynix has tripled.
The immediate catalyst is AI-driven semiconductor demand, particularly for high-bandwidth memory (HBM) products. Joshua Crabb of Robeco observes that high US tech valuations have investors asking: "If those valuations are correct, which parts of the supply chain remain relatively undervalued?"
Earnings validate the optimism. Samsung, the world's top memory chipmaker, reported Q3 operating profit up over 30% YoY - a three-year high. SK Hynix is expected to post strong quarterly results this Wednesday. Both firms reportedly secured contracts this month to supply chips for OpenAI's $500 billion "Stargate" data center project.
Governance Reforms Attract Foreign Capital South Korea's push to improve market valuations and chaebol governance has successfully drawn foreign investors. Saporta compares this to Japan's reforms a decade ago, noting Korea is "following Japan's playbook with some tax reforms" - a combination that's "exciting investors."
Concrete measures are unfolding: July's commercial law revision clarified directors' duties to shareholders. The government plans dividend tax cuts, while the ruling party proposed mandating treasury stock cancellations.
Analysts believe these measures could further catalyze the Kospi and address long-standing minority shareholder concerns. Anticipation has already boosted shares of conglomerates and financial firms holding substantial treasury stocks.
Foreign Inflows vs. Retail Caution Foreign investors have shifted from net sellers in H1 to buying ₩2 trillion ($1.4 billion) worth of stocks YTD. CLSA's Jongmin Shim expects continued inflows, as current foreign buying remains below mid-2024 levels.
Notably, despite the rally, momentum-chasing Korean retail investors have largely stayed sidelined. Shim notes: "Net buying comes mainly from foreigners and domestic institutions. Only when we see further Kospi gains will retail money return - that's when I'd start worrying."
Key Supply Chain Manufacturers Rise Beyond tech, defense, shipbuilding and battery stocks have powered this year's gains.
Since Russia's Ukraine invasion, South Korea became a top-10 arms exporter. Investors expect its cost-competitive manufacturers to benefit from Western rearmament. Hanwha Aerospace shares have soared 296% YTD, while HD Hyundai Heavy Industries (top shipbuilder) gained 116%.
In batteries, LG Energy Solution (world's #3 producer) jumped over 40% this month on AI server storage demand and EV optimism. As Chinese rivals face US trade barriers, LG is gaining ground in America's energy storage market.
Additionally, expectations for potential US trade deals ahead of former President Trump's Wednesday meeting with opposition leader Lee Jae-myung have boosted sentiment.
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