South Korea’s Kospi index has witnessed an impressive surge of over 66 percent this year, establishing itself as the top-performing major stock index globally. This remarkable performance is largely attributed to rising enthusiasm surrounding artificial intelligence (AI) technologies and the ongoing reforms in corporate governance practices across the nation. The index’s growth is significant, outpacing the S&P 500 by a substantial 49 percentage points, marking the widest margin seen in the last two decades.
The recent rally represents a dramatic shift for the Kospi, which had struggled for a prolonged period, often trading below a price-to-book ratio of one—a clear indication that investors perceived many stocks as undervalued. Analysts note that this turnaround reflects a broader re-evaluation of the Korean market, as noted by Albert Saporta, group chief executive of asset management firm GAM, who remarked on the market’s past undervaluation.
Several factors contribute to the index’s growth, primarily driven by investments in AI and corporate governance reforms. The two largest companies within the Kospi, Samsung Electronics and SK Hynix, play pivotal roles, collectively accounting for nearly 30 percent of the index. Samsung’s shares have surged by over 90 percent, while SK Hynix has tripled, bolstered by a significant increase in demand for AI-driven semiconductor technology, especially in high-bandwidth memory products. The positive outlook for these companies is underscored by Samsung’s reporting of a more than 30 percent increase in operating profit in the third quarter, reaching a three-year high. SK Hynix is also anticipated to show strong quarterly earnings soon, following the announcement of a semiconductor supply deal with OpenAI for the Stargate data center project.
Government-led initiatives to enhance corporate governance within South Korea’s family-controlled conglomerates have also rekindled foreign interest in the market. This approach mirrors Japan’s corporate reforms from a decade ago, which significantly bolstered its stock indices. Recent amendments to South Korea’s commercial code have established clearer responsibilities for directors towards shareholders, alongside proposed tax cuts on dividends and legislation mandating companies to repurchase their own treasury shares.
In parallel, a reversal in foreign investment trends has emerged, with foreign investors transitioning from net sellers in the first half of the year to net buyers, acquiring approximately 2 trillion won ($1.4 billion) in equities. Analysts expect this trend to extend as investment flows remain below levels observed in mid-2024.
Despite the impressive performance of the Kospi, the trend has been largely driven by foreign and institutional investors, with local retail investors yet to join the rally. Equity strategist Jongmin Shim from CLSA noted that a sustained increase in the Kospi could potentially attract retail investors back into the market, a development he would monitor closely.
The Kospi rally has also been supported by advancements in sectors such as defense, shipbuilding, and battery production. For instance, shares of Hanwha Aerospace, the largest defense manufacturer in South Korea, skyrocketed by 296 percent, while HD Hyundai Heavy Industries, the leading shipbuilder, saw a rise of 116 percent. The conflict in Ukraine has positioned South Korea among the world’s top ten defense exporters, creating optimism about its ability to capitalize on the global trend of military re-armament.
Battery manufacturers are not left out, with companies like LG Energy Solution enjoying a spike of over 40 percent recently. The anticipated growth in AI-driven energy storage demand and the positive outlook for electric vehicle sales amidst competitive U.S. trade policies have fortified investor confidence.
The overall sentiment in the market is further buoyed by expectations of a trade deal between the U.S. and South Korea, ahead of an upcoming meeting between President Trump and South Korean President Lee Jae Myung. This anticipated dialogue adds another layer of optimism to the Korean market as it seeks to navigate its path toward further growth.
