By Reshma Kapadia
South Korea's benchmark stock index recorded its biggest one-day drop on Wednesday, a dramatic response tied to oil and Iran -- and a stunning reversal for world's top-performing market last year.
But if you missed out on that rally, know that there are global strategists who don't think this selloff is a buying opportunity -- at least not yet.
The KOSPI Composite index fell 12% overnight and the iShares MSCI Korea ETF is down 1.8% to $130.54. in U.S. morning trading.
South Korean stocks were a natural target for selling: Not only did that market log a 74% gain in 2025 but it was also the best-performing stock market in the first two months of this year, up 46%.
Investors have crowded in. Just this year, South Korea took in a large share of emerging market inflows, with $4 billion going into the iShares MSCI Korea ETF -- accounting for about 30% of its market cap, according to PGM Global.
The selloff is also because the biggest winners in the most-winning market have been memory chip makers Samsung Electronics and Hynix. And they are energy intensive -- a concern as the Iran conflict raises the prospects of oil spikes.
Almost 70% of South Korea's oil imports come from the Middle East and about 16% of its liquefied natural gas imports, according to Barclays analysts. The fighting in Iran increases the risk of higher electricity costs for the country's energy-intensive firms.
"Industrial electricity rates have already risen by 70% since 2022 due to multiple hikes by the Korean government," PGM Global strategists told clients in a note.
"If the conflict persists, higher gas prices would be reflected later for energy-intensive firms through higher industrial power rates, affecting their margins," they wrote.
A wider or protracted conflict in the Middle East that curtails oil flow is certainly a risk. But Asian countries, including South Korea, have been building up their oil inventories.
The South Korean government, in fact, considers its domestic oil supply to be stable, with about 200 days-worth of oil secured in reserves, South Korean newspaper The Chosun Daily reported.
And the declines haven't soured many who track South Korea's market, such as Charlie Linton, who is Asia equity portfolio manager at asset management firm Ninety One.
Linton describes the declines as a momentum reversal rather than structural problem. Margins for memory chip makers have significantly increased with severe supply constraints at a time of increased demand for AI.
"Operating momentum remains strong and the current level of returns on equity and growth more than justify the valuation," Linton told Barron's about the chip makers.
"The rest of the market also has longer term catalysts, benefiting from the Korean government's bid to raise valuations of its companies and remove what is known as a 'Korea discount' because of capital allocation and governance issues," he went on.
Another potential positive: Increased demand for the country's asset-heavy companies -- shipbuilding, shipping, defense, and electric energy -- in a push to boost national security and become more self-reliant.
"These catalysts have meant that domestic investors in particular have been excited to invest into their local market having in the past been focused on investing overseas, in particular in U.S. tech," Linton wrote in an email.
The domestic interest in the market earned it the nickname of the "Squid Game" market, teeing off the Netflix series of high-stakes risk taking that can make for sharp moves because of retail investors.
Indeed, on Wednesday, Société Générale analysts noted volatility in South Korea's market at a level last seen during the global financial crisis starting in 2007.
Of note: A sharp drop in retail flows from an average of $4 billion in the previous two days to $54 million and the second-highest level of options purchases in the past five years, the analysts wrote in a note to clients.
For fund managers though, there's still a long-term draw. Korean stocks are still relatively cheap at 12.2 times forward earnings, compared with the S&P 500.
There's reason for that discount, including elevated earnings corporate governance issues. But PGM strategists expect valuations to eventually narrow their gap with the U.S. as corporate governance efforts gain traction and companies boost stock buybacks.
That sets up Korean stocks well for the longer term, but it may not yet be the time to jump back in.
"While we like Korean equities in the long term, rising energy prices pose a risk. As a result," PGM strategists wrote, telling clients they see a better near-term opportunity in Brazil, which is even cheaper and not as vulnerable to Iran-related ripples.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 04, 2026 12:10 ET (17:10 GMT)
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