How did South Korea clinch the top spot in global markets?
Stock markets across the globe have shrugged off months of geopolitical and economic turmoil with all major indexes rallying since the start of the year.
The FTSE has risen 19.8 per cent since January, hitting record highs,while the Nasdaq has jumped 21.7 per cent buoyed by the AI boom, and Japan’s Nikkei 255 reaped the benefits of increased foreign investor interest, rising by 29.9 per cent.
But nowhere has seen a rally quite as astonishing as South Korea’s Kospi, which has gained more than 73 per cent this year, hitting a total market cap of 3,687.5 trillion KRW (£1.92 trillion).
The Kospi has burst onto the global scene, in a staggering recovery for the market.
It had fallen increasingly out of favour since 2022, with many retail investors viewing the index as a ‘value trap’.
More recently, the political turbulence caused by the impeachment of President Yoon Suk Yeol and nationwide protests also damaged share prices.
While some investors saw this as a loss, fund managers spotted an opportunity.
Mark Preskett, senior portfolio manager at Morningstar Wealth, said: “The chaos understandably left Korean stocks trading at attractive valuation levels, with two thirds of listed companies trading at less than book value.
“Our thesis was simple, South Korea was offering investors an incredibly cheap way into the AI story.”
AI and semiconductors
While the Kospi is predominantly home to both small-caps and mid-caps, it is the performance of its big players that have bumped up the share price.
Fund managers have increasingly shrunk their US allocations in recent months, as fears over the end of the AI bubble gather steam, but some investors are unwilling to give up on tech stocks.
This has led firms to look towards Asian markets, which offer attractive tech investments detached from America, including Taiwan and Japan, home to tech giant SoftBank.
SoftBank, controlled by billionaire Masayoshi Son, has been among the top Japanese performers, with its stock more than doubling so far this year.
However, it is South Korea that has pulled in the most interest, predominantly through heavy hitters Samsung and SK Hynix, who together make up 30 per cent of the Kospi.
Electronics giant Samsung, the index’s biggest constituent, is up 93.8 per cent this year to date, trading at 4,150.39 KRW, buoyed by strong demand for Apple’s iPhone sales, for which it manufactures several components including the screen.
SK Hynix, which is one of the world’s largest semiconductor vendors, is up a staggering 260.4 per cent, trading at 617,000 KRW.
By trading at approximately a half-discount to the US, it offers investors a way to tap into the tech market with minimal risk, and more people are taking notice.
Both companies are manufacturers of high bandwidth Memory chips and with demand for the semiconductors rocketing,in particular in the US, SK Hynix has already sold out its entire 2026 chip production capacity.
Shareholders to the forefront
South Korea has also implemented a number of corporate governance reforms to attract overseas investors and drive “stronger returns”.
Preskett said: “The index is dominated by ‘chaebols’, large family run conglomerates, and in many cases shareholders take a back seat.
“Dividend payouts are low, profitability levels below peers, buybacks are rare and firms often hoard cash.”
But he acknowledged that since the June elections the government is following reforms similar to that of Japan, modifying the commercial code to instead benefit shareholders, marking explicit director’s duty towards them.
In contrast to the UK, where speculation is mounting that the Treasury will hike divided taxes, as part of broader reforms, the government is preparing to overhaul its dividend tax system.
Dividend payouts are currently taxed at a top marginal rate of 45 per cent for annual income exceeding 20m KRW.
The government is proposing to slash the tax rate to 14 per cent for investors earning under 20m KRW and 20 per cent for incomes up to 300m KRW.
The top rate will be set at 25 per cent, down from an initial proposal of 35 per cent.
Will it last?
Despite the market’s rally, many fund managers are keeping focus on the day to day performance of the index, remaining on alert to any potential downfalls, in particular due to the length of its bullish run.
But Morningstar is optimistic of the market’s future, remaining overweight in stocks and accessing the market directly through Korea ETFS.
Preskett credited this primarily to the cheap valuations of AI stocks, while investor sentiment has also been boosted by the near completion of a trade deal between the US and South Korea.
The two sides will reduce reciprocal tariffs from 25 per cent to 15 per cent, with South Korea agreeing to invest $350bn (£265bn) into the country.
But the agreement is yet to hit paper, with South Korean officials pinning the delay to discussions over their request for Washington to give the greenlight for the country to build a nuclear powered submarine.
The country’s governance shift is also expected to lure in more domestic retail investors, alongside the influx of foreign investors and institutions.