South Korean equities Surge: Re-Rating and AI Boom

Key Takeaways

• The KOSPI, the main stock market index of South Korea, rallied amid an AI-led memory super-cycle and a powerful earnings upgrade cycle.

• Despite strong gains, valuations remain discounted versus global peers due to structural factors and cyclical risk perceptions.

• Near-term volatility is driven by energy/geopolitical shocks, but Korea’s core fundamentals remain robust.

• Governance reforms and value-up initiatives are gradually narrowing the long-standing “Korea discount”.

Market Performance and Volatility

Korean equities delivered exceptional performance in 2025, with the KOSPI rising 75.6%, and reaching record highs above 7,490 points in May 2026. Gains were led by semiconductor and capital goods companies, supported by AI-driven demand, policy catalysts and strong earnings upgrades.

However, the index experienced a sharp correction in March following geopolitical tensions in the Middle East and rising energy prices. The conflict triggered profit-taking and heightened global risk aversion, including a historic one-day decline of 12.7%. The KOSPI is still however up 77.7% year-to-date (31-Dec-25 to 7-May-26).

Energy lifeline threatened

• Korea’s economy remains structurally exposed to global energy markets:

• 70% of crude imports sourced from the Middle East

• Nearly all crude flows pass through the Strait of Hormuz

• 20% of LNG imports also sourced from the region

• Oil (37%) and gas (20%) represent a large share of energy supply

• These two sources combined generate roughly one quarter of the country’s electricity, further underlining Korea’s vulnerability

While vulnerability is high, short-term supply disruption risk is limited due to:

• 200+ days of oil inventories

• Diversified short-term procurement (50–60mn barrels secured monthly)

• LNG inventories (2 weeks) and alternative suppliers

• Significant nuclear generation capacity (1/3 of electricity)

The primary risk is therefore corporate margin compression from higher energy prices rather than physical shortages.

Semiconductor Concentration and Supply Chain Risks

The KOSPI is highly concentrated in technology, particularly memory semiconductors:

• 35–40% of index weight is driven by a few large chipmakers

• 50% weight in MSCI Korea if caps are removed

Key vulnerabilities include:

• Helium supply constraints, used in chip making (2/3 sourced from the Middle East)

• Electricity and freight costs

• Global capex sensitivity

These firms remain central to index performance but increase cyclical volatility.

If the Iran shock fades and energy prices stabilise at lower levels, the KOSPI has a credible path to resume its uptrend because the core drivers of the 2025–2026 rally are still intact and fundamentals remain resilient and strong.

Earnings Momentum: Core Driver of the Rally

The equity rally is fundamentally earnings-driven:

• +40% KOSPI earnings growth in 2025, driven by chipmakers

• Strong rebound from prior profit recession (2022–2023)

• 130%+ expected earnings growth in 2026 consensus estimates

• Continued upward revisions (among strongest globally)

Key drivers looking ahead:

• AI-led semiconductor cycle

• Consensus estimates of 130% earnings expansion for 2026

• Sustained AI related tech demand

• Governance reforms improving capital returns

Longer-term forecasts remain positive but normalize post-2026 (19% in 2027, ~6% in 2028), reflecting typical memory cycle dynamics.

Market remains on discount

• The index trades at ~8x 12-month forward P/E, below its 10-year average of 10.5x and well under peak multiples seen in past bull cycles

• Even at the late-February high above 6,300, forward P/E only reached its 10-year average, which was not excessive given strong earnings momentum

• Structural cyclicality of the memory chip industry continues to weigh on Korea’s valuation multiples over time

• Forward P/B stands at 1.3x, above its 10-year average of 1.0x

• However, it remains meaningfully below both developed and emerging market averages

Corporate Governance Reforms: Potential Catalyst for Re-rating

• Korea is advancing a multi-year reform agenda to improve governance, strengthen shareholder rights, and narrow the “Korea discount” versus global peers

• Core aim is better capital allocation, higher transparency, and more predictable shareholder returns, supporting potential valuation re-rating

• Reforms span regulation, tax policy, and market structure, targeting structural inefficiencies in conglomerate-dominated firms

• Initiated by the 2024 Corporate Value-Up Program and now broadened under the current administration

• Key focus areas: cross-shareholdings, weak dividend discipline, treasury share practices, and minority shareholder protection

• These structural issues have historically been key drivers of the Korea discount

Conclusion: Korean stocks remain attractive

• KOSPI’s rally is driven by a mix of cyclical recovery and structural themes, notably AI and governance reform

• Earnings momentum remains strong with continued positive revisions, while valuations stay relatively undemanding versus global peers

• Sustaining the rally requires normalisation in oil and LNG markets to ease import-driven margin pressure

• Continued strength in the semiconductor cycle is essential, as chipmakers remain the main earnings driver

• Broader market participation, supported by governance reforms, is needed to narrow the Korea discount and extend gains over the longer term