From "below book value" to the world's strongest: What makes the Korean stock market stand out?

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Driven by both the artificial intelligence boom and expectations for corporate governance reform, the Korea Composite Stock Price Index (Kospi) has surged more than 66% this year, becoming the best-performing major stock index in the world. The driving forces behind this rise are attracting global investors’ attention.

So far this year, the Kospi index has outperformed the S&P 500 by 49 percentage points, marking the largest gap in two decades. For most of the past three years, the index’s price-to-book ratio had fallen below 1, meaning most investors believed its component stocks were worth even less than the companies’ own assets.

Now, with foreign investment returning and AI boosting the country’s largest companies (especially chipmakers), investors are reassessing this market. Albert Saporta, Group CEO of asset manager GAM, commented:

“This is a comprehensive re-rating of the Korean market. Before this rally, the Korean market was very cheap.”

Analysts attribute this bull market to the combined effects of three main pillars: bets on the future of artificial intelligence, sweeping corporate governance reforms, and the booming exports of manufacturers in Korea’s key supply chains.

AI-driven Chip Boom

The rise of the Kospi index is largely thanks to the strong performance of its two major heavyweights—Samsung Electronics and SK Hynix, which together account for nearly 30% of the index weight. Since the beginning of the year, Samsung’s share price has risen over 90%, while SK Hynix’s share price has tripled.

The immediate catalyst for this surge is AI-driven demand for semiconductors, especially for their high bandwidth memory (HBM) products. Joshua Crabb, Head of Asia-Pacific Equities at Robeco, noted that the high valuations of US tech giants have led investors to ponder:

“If that valuation is justified, which other parts of the supply chain are relatively undervalued?”

Performance also confirms the market’s optimism. Samsung Electronics, the world’s largest memory chip maker, reported that its operating profit for July to September rose by more than 30% year-on-year, hitting a three-year high. At the same time, SK Hynix is also expected to report strong quarterly results this Wednesday. Additionally, it’s reported that both companies have reached agreements with OpenAI this month to supply semiconductors for OpenAI’s “Stargate” data center project, which is valued at up to $500 billion.

Corporate Governance Reform Attracts Foreign Capital

Efforts by the Korean government to improve stock market valuations and family-controlled conglomerate governance have succeeded in drawing foreign investors’ attention. Albert Saporta compared these moves to Japan’s corporate governance reforms a decade ago, noting that Korea is “emulating what Japan did ten years ago, combining it with some tax reforms,” which “is exciting investors.”

Concrete reforms are being implemented step by step. In July, South Korea revised its Commercial Law to clarify directors’ responsibilities to shareholders. The government is now preparing to cut dividend taxes, and the ruling party has tabled a bill mandating companies to cancel their treasury shares.

Analysts believe that once these measures are implemented, they will become another catalyst for the Kospi index and help end the long-criticized issue of controlling shareholders “abusing” minority shareholders. Expectations for these measures have already driven up the share prices of conglomerates and financial groups with large holdings of treasury stock.

Foreign Investment Returns as Retail Investors Remain on Sidelines

Changes in capital flows are the most direct reflection of market sentiment. After being net sellers of Korean stocks in the first half of this year, foreign investors have now turned net buyers, purchasing 2 trillion won (about $1.4 billion) worth of stocks so far this year.

Jongmin Shim, Korea equity strategist at CLSA, said he expects the inflows to continue, as the current amount of foreign net buying is still below mid-2024 levels.

Notably, despite the stellar market performance, Korea’s retail investors—known for chasing momentum—have largely been absent from this record-breaking rally. Jongmin Shim commented:

“Net buying is mainly coming from foreigners and domestic institutions. Once we see further rises in the Kospi index, retail money will return and push the market even higher. That’s when I’ll start feeling concerned about the market.”

Rise of Key Supply Chain Manufacturers

In addition to technology stocks, the rally in Korean stocks this year has also been strongly supported by manufacturers in key areas such as defense, shipbuilding, and batteries.

Since the Russia-Ukraine conflict, Korea has become one of the world’s top ten defense exporters. Thanks to a manufacturing base with cost advantages, investors expect South Korea to benefit from Western countries’ rearmament trends. Share prices of Hanwha Aerospace, Korea’s largest defense manufacturer, have soared 296% this year. Meanwhile, Korea’s largest shipbuilder, HD Hyundai Heavy Industries, rose 116%.

In the battery sector, driven by demand for storage facilities for AI servers and growing optimism about electric vehicle sales, LG Energy Solution, the world’s third-largest battery producer, saw its share price rise over 40% this month. As its Chinese competitors have been hit by US trade policies, LG Energy Solution is making progress in the US energy storage market.

In addition, ahead of President Trump’s scheduled meeting with his Korean counterpart Lee Jae Myung on Wednesday, expectations of a trade deal with the US have lifted investor sentiment.

Risk warning and disclaimerThe market involves risks, and investment should be done with caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this article is at your own risk. ```