Turbulence tests South Korea’s stock market revival

After decades in the investment wilderness, South Korean equities are back in the headlines, for good and bad reasons. Last year the Kospi index smashed past historic records and delivered the strongest returns of any major bourse worldwide. This year, before war engulfed the Middle East, it had surged by a world-beating 44 per cent. Last week, however, the market suffered its worst ever one-day drop and the largest fall in a broader sell-off in high-tech Asian nations’ stocks as investors worried over their dependence on energy imports. The index has since regained 10 per cent from its nadir, but it remains volatile. For policymakers determined to end the so-called Korea discount, the rollercoaster ride shows there is more work to do.

Longstanding concerns over corporate governance standards have meant South Korean stocks have been perennially discounted by investors. The country’s private sector is dominated by chaebols: sprawling family-owned conglomerates with complex ownership structures, which are often accused of placing control and value extraction for relatives ahead of shareholders’ interests.

President Lee Jae Myung, who won elections last year, has prioritised stock market reforms to drive economic growth. He deserves credit for tackling the power of large companies. Last July a law passed making it a legal duty for directors to consider the interests of all shareholders rather than just the company. In late February an amendment was approved requiring companies to cancel newly acquired treasury shares within a year, ending a practice that investors say has helped owner families maintain control.

These measures sparked a re-rating of South Korean stocks, but the country’s high-tech manufacturers were mostly behind its recent rally. Memory chip producers Samsung Electronics and SK Hynix, which account for 40 per cent of the Kospi’s market capitalisation, have reaped handsome profits from the global data centre boom. Indeed, even before the recent turbulence, the speed of Kospi’s rise looked hard to sustain and vulnerable to sentiment around AI. Analysts had also noted signs of froth, including the fast-growing craze among retail traders — commonly known in the country as “ants” — for leveraged exchange traded funds.

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The US-Israeli war in Iran has punctured the exuberance. South Korea’s chip industry, like Taiwan’s, depends on gas and other raw materials, such as bromine, sourced from the Middle East. If the conflict intensifies, global AI supply chains could face disruption. Either way, the recent volatility is not a good look for attracting investors, and Korean stocks continue to trade at a discount relative to peer nations. To rebuild confidence and put the country’s equities on an even firmer footing, the government should press on with wider reforms.

Lowering inheritance tax rates — one of the highest in the OECD — would weaken the perverse incentive for controlling shareholders to suppress valuations. Improving financial market access might help convince index provider MSCI to promote the country to its developed market basket — a move that would boost inflows from institutional investors. Market turbulence also underscores the importance of domestic economic policy. Efforts to loosen rigid labour laws would enhance productivity and support corporate dynamism beyond the tech sector. With imports accounting for around 98 per cent of the country’s fossil fuel consumption, policymakers must step up energy security initiatives too.

Last year’s historic surge in South Korean stocks shows what targeted reform can achieve alongside a strong tech sector. But the Kospi’s recent oscillations are also a reminder that the market still rests on fragile foundations.