World-beating stock rally creates new headaches in South Korean market

[SEOUL] The words ‘Kospi 4,000’ have been glowing in gaudy yellow text across a giant screen wrapping the Korea Exchange this month, a monument to the spectacular rally that few imagined possible just a year ago. For some investors, it’s also a warning sign.

Up 61 per cent so far in 2025, South Korean stocks are on track to post their strongest gains in a quarter century. Having started the year at around 2,400, the Kospi is the world’s best-performing major benchmark thanks to the AI boom and sweeping corporate reforms.

The spark that lit the rally was President Lee Jae-myung’s pledge to drive the index towards the 5,000 level, a rare political commitment to reach a market milestone. But the speed of the ascent – which has stunned Wall Street’s biggest banks and policymakers alike – has also stirred doubts about its staying power, with much of this year’s gains driven by Samsung Electronics and SK Hynix.

Growing anxiety over the heated AI valuations has triggered sharp swings in shares recently, with the benchmark tumbling nearly 4 per cent on Friday (Nov 21) amid a global rout. Retail investors are piling in with borrowed money at record levels. Further equity gains will hinge on whether the biggest companies embrace governance reforms and how far authorities will push for change.

Some investors are already pulling back. “We don’t feel we want to be significantly overweight,” said Sam Konrad, an investment manager who oversees US$2.8 billion at Singapore-based Jupiter Fund Management Overseas funds have returned to net selling this month, putting November on track for one of the biggest outflow periods this year.

When Lee first unveiled his Kospi target, few saw it as achievable. Capital markets were still reeling from a shock declaration of martial law in December last year, which only worsened the “Korea discount” – the perennial markdown of valuations tied to weak governance.

Yet the ambitious proposal coincided with a global pivot towards AI and chip stocks, driving a dramatic turnaround. In recent weeks, JPMorgan Chase and Citigroup have upgraded their index-level targets, with the former citing 5,000 as a base case and the latter forecasting 5,500 by the end of 2026.

“Nobody predicted the market would jump so fast,” said Park Hong Bae, a lawmaker in the ruling Democratic Party and a member of the Kospi 5,000 committee task force. “It rose faster than even what we had predicted.”

Part of the government’s push is to pull money away from Korea’s overheated property sector. In a sign of pan-government commitment towards revitalising the equities market, the top official at the financial watchdog sold one of his two apartments in the affluent Gangnam area, and bought exchange-traded funds with some of the proceeds.

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Still cheap

Despite the simmering unease accompanying such hefty equity gains, bulls still see plenty to be optimistic about. The AI-driven demand has sparked a “supercycle” for Korean chip stocks, analysts say.

Samsung Electronics and SK Hynix remain relatively cheap even after this year’s blistering rally – trading at 10 and seven times forward earnings. That compares with a ratio of 16 for regional tech stocks and 27 for Nvidia.

“Korean stocks are still cheap in global context,” said Jonathan Pines, a portfolio manager at Federated Hermes, who believes the market could double or even triple if Korea’s valuation discount is eliminated.

Driving the next leg of the rally will require more momentum on corporate governance reforms. With the Commercial Act amendments passed – a crucial first step to boosting board accountability – investors are now eyeing progress on a bill to lower the dividend tax rate and a separate vote on mandatory cancellation of treasury shares, long used by conglomerates to maintain control.

Questions over enforcement remain. Notably, the country’s biggest company Samsung Electronics has yet to unveil its own “Value Up” plan to boost shareholder returns.

“We need to see what the actual concrete reforms are,” said Yiping Liao, a portfolio manager at Templeton Global Investments. “Rhetoric will help to charge short-term performance, but in the end, you need to look at what the party actually does”

Retail leverage adds another layer of risk. There are signs that Korea’s risk-loving mom-and-pop traders are shifting money back home after ploughing into overseas equities. If early trends hold, November would mark the first month of retail inflows since April.

Margin trading has hovered around 26 trillion won (S$23.1 billion) for much of November, rising about 50 per cent in six months, according to the Korea Financial Investment Association. There is also concentration concerns, given nearly half of Kospi’s 2025 rally has come from Samsung Electronics and SK Hynix.

For Korea’s market, the 5,000-point flag ultimately hinges on whether companies do enough to lift shareholder returns and strengthen the market, said Kim Dojoon, chief investment officer at Zian Investment Management. “If it keeps racing like nowadays, it could hit 5,000 but it will fall back.” BLOOMBERG