RPT-BREAKINGVIEWS-War angst and AI hype mar Seoul's market ambitions

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Robyn Mak

HONG KONG, March 5 (Reuters Breakingviews) - When South Korea's President Lee Jae Myung took office in June, many were sceptical of his campaign pledge to double the country's benchmark KOSPI index .KS11 to 5,000 within his five-year term. Just eight months later, though, the KOSPI topped 6,000, becoming the best-performing major index globally. But this week's rollercoaster ride has exposed just how volatile the country's stocks are. Between war angst and artificial intelligence hype, Lee now faces a new headache: steadying markets.

Thanks to booming demand for AI-related hardware and infrastructure, global investors flocked to South Korean heavyweights such as memory chip giants Samsung Electronics 005930.KS and SK Hynix 000660.KS. As of January, foreign holdings of local stocks topped$1.1 trillion, more than double the level from a year earlier and 32% of the total. Shares in AI darlingSK Hynix have risen roughly fivefold over the past 12 months, vastly outperforming its key customer Nvidia NVDA.O and rivals.

War in the Middle East has not only sapped that momentum but also injected volatility virtually unseen in a major stock market. In just the three trading days following the U.S. and Israeli air strikes in Iran that killed many of the country's top leaders, including Supreme Leader Ayatollah Ali Khamenei, the benchmark KOSPI closed down 7%, then another 12% – a record daily selloff – before rallying as much as 12% on Thursday morning. The export-driven economy's sensitivity to rising oil prices, concerns over global stagflation, plus broad-based profit-taking are all factors, according to Jason Liu, head of APAC equity and derivatives strategy at BNP Paribas.

Having staked much of his political capital on a strong stock market, Lee's priority now is to ease volatility. Officials have been quick to reassure investors that it will deploy its 100 trillion won ($68 billion) market stabilisation fund. The government is also preparing to introduce initiatives to encourage the country's army of retail investors to repatriate their foreign stock holdings.

Yet it's unlikely Seoul can do much to tame hot money flows. Just before the attacks on Iran, foreign investors sold a net $4.8 billion of shares on Friday – the largest one-day outflow on record – suggesting many funds had already started to unwind their bets; and in the midst of Wednesday's historic market crash, foreign investors were actually net buyers, per BNP's Liu. War or not, Seoul has its work cut out steadying markets.

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CONTEXT NEWS

South Korea's benchmark KOSPI index rallied as much as 12% on the morning of March 5, following a record selloff of 12% the previous day.

President Lee Jae Myung affirmed the government's readiness to deploy market stabilising measures if needed. "We must proactively respond to increased financial market volatility. We should accelerate policy efforts and swiftly implement and manage the 100 trillion won market stabilisation programme," Lee said at a policy meeting. He was referring to the government's emergency fund that can be deployed in times of major market declines.

(Editing by Antony Currie; Production by Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on MAK/ robyn.mak@thomsonreuters.com))