South Korea’s benchmark Kospi Index has been making headlines this month, setting 16 intra-day records so far and surpassing the 4,000 mark. This impressive rally has seen the index gain nearly 21% in October alone, contributing to a year-to-date surge of over 72%. In comparison, regional counterparts such as Japan’s Nikkei 225 have risen by 26%, and China’s CSI 300 has experienced an increase of more than 19%.
The driving forces behind this surge include robust optimism related to artificial intelligence (AI) and significant corporate governance reforms in South Korea. Analysts indicate that this rally is not only a reflection of global AI trends but also of local structural changes that are gradually diminishing what has been termed the “Korea discount.” This discount historically led South Korean equities to trade at lower valuations compared to their global counterparts due to concerns over corporate governance and low shareholder returns.
The two major South Korean companies, Samsung Electronics and SK Hynix, have been key players in this growth, representing over 1,000 trillion won in market capitalization and accounting for more than 30% of the entire Kospi index. The recent recovery in the memory semiconductor sector has notably uplifted corporate earnings, contributing to a more favorable investor sentiment. Strong demand for high bandwidth memory used in generative AI applications has propelled SK Hynix to post record quarterly revenue and profits, with its shares more than tripling this year. Likewise, Samsung Electronics has seen its operating profit more than double from the previous quarter due to a resurgence in its chip division, with its share price soaring by over 96%.
In addition to the semiconductor boom, South Korea is experiencing a transformation in corporate governance through policies aimed at creating more shareholder-friendly practices. The government’s “Value-Up Program,” initiated in 2024, aligns closely with Japan’s own corporate governance reforms. This initiative encourages listed firms to enhance shareholder returns and governance standards, seeking to eliminate the longstanding valuation gaps between Korean companies and their global peers.
The Kospi’s price-to-earnings (P/E) ratio stands at 17.65, in contrast to the Nikkei 225’s ratio of 25.86 and the CSI 300’s 18.12, suggesting that Korean equities still have room for growth. Experts argue that the recent regulatory shifts have led many to reassess their views on Korean equities, with increasing confidence that the “Korea discount” might be eradicated in the coming years.
Interestingly, while foreign investment was crucial in igniting this year’s rally, domestic investors have taken a greater role in sustaining the momentum. Data indicates that foreign investors contributed to early gains, but have recently net sold 1.37 trillion won in Kospi firms, yet the index has preserved its upward trajectory thanks to a surge in buying from local institutional and individual investors. Yuanta Securities reports that domestic investors have been actively engaging in “dip-buying,” which is seen as a positive sign for the market’s resilience.
Despite this positive outlook, analysts caution that potential risks loom on the horizon. Geopolitical tensions, uncertainties surrounding U.S. interest rates, and domestic asset inflation could introduce volatility. Some market experts point out that foreign interest in semiconductors appears to be dwindling, which may create short-term fluctuations, although they remain optimistic about the fundamentals.
Furthermore, while the current rally builds on high expectations for technology earnings and favorable trade policies, any disappointments in these areas could lead to corrections in the market. However, the prevailing sentiment among analysts suggests that the combination of South Korea’s strong positioning in AI, ongoing regulatory reforms, and attractive valuations ensures a favorable long-term investment case.
In summary, the Kospi’s record-breaking performance this month illustrates a robust blend of technological advancement and structural reform in South Korea, shining a spotlight on the nation’s potential in the evolving global economic landscape.
