South Korea’s benchmark Kospi index has continued its record surge this month, hitting new intraday highs 16 times so far, driven by a combination of AI-driven optimism for semiconductor companies and sweeping corporate governance reforms. The rally has pushed the index above 4,000 points and is up nearly 21% so far in October alone. The index has soared more than 72% this year, outpacing regional peers such as Japan’s Nikkei 225, which rose 26%, and mainland China’s CSI300, which rose more than 19%. Analysts told CNBC that the rise in Korean stocks reflects both global AI tailwinds and structural changes at home, where the long-standing “Korea discount” is steadily eroding. “AI cannot be ignored. It will be the driver of long-term growth in the coming years,” said Arjun Jayaraman, portfolio manager at Causeway Capital Management, adding that Samsung and SK Hynix are “at the heart” of this growth. According to data provided by Yuanta Securities, the combined market capitalization of Samsung Electronics and SK Hynix exceeds 1,000 trillion won, accounting for more than 30% of the entire Kospi index. “The main driver of this rally is the recovery in the memory semiconductor sector and the associated upward revision of corporate earnings,” said Daniel Yu, head of global asset allocation at Yuanta Securities. Strong expectations for earnings from major companies such as Samsung and SK Hynix boosted investor sentiment, further fueled by predictions of a supercycle due to a global memory chip shortage. SK Hynix on Wednesday reported record sales and profits for the quarter, driven by strong demand for high-bandwidth memory used in generative AI chipsets. The company’s stock price has more than tripled this year. Samsung Electronics reported a recovery in profits on Thursday, with operating profit more than doubling from the previous quarter due to a recovery in its chip business, sending the stock price over 96%. Reforms and the ‘Korea Discount’ Beyond semiconductors, policy shifts and corporate governance reforms are boosting investment opportunities in South Korea. Regulators and lawmakers are increasingly promoting shareholder-friendly practices under “value-up programs” aimed at closing the valuation gap between Korean companies and their global peers, market experts said. “Korean stocks have historically traded at a deep discount to global and regional markets due to factors often referred to as the ‘Korea discount,’ including corporate governance concerns and low shareholder returns,” said Fiona Yang, portfolio manager at Invesco. According to FactSet data, the Kospi has a P/E of 17.65, the Nikkei Stock Average has a P/E of 25.86, and China’s CSI 300 has a P/E of 18.12. “But over the past two years, we have seen a paradigm shift in regulatory attitudes,” Yang said. The government’s corporate value improvement program, which will begin in 2024, is widely seen in South Korea as a counterbalance to Japan’s corporate governance reforms based on the Tokyo Stock Exchange’s “Prime” restructuring. The initiative aims to improve the stock market valuation of Korean companies by encouraging listed companies to improve shareholder returns and governance. “The rise was supported by expectations for the government’s corporate value enhancement program, which will eliminate the long-standing ‘Korea discount’ and boost stock market performance,” said Michelle Kam, investment strategist at Standard Chartered’s chief investment office. “If regulators continue to commit to these value-enhancing initiatives, the market will be able to sustain its upside,” Yang said. Some initiatives include tax incentives for companies that participate in the program, particularly those that increase dividend payments or share buybacks. This will encourage companies to use excess cash for dividends, stock buybacks and business restructuring. While foreign investors lit the fuse for this year’s bull market, domestic investors have taken over the baton. Foreign institutional investors drove the initial rally late last year by buying into large tech stocks, but domestic institutions and individuals have since stepped in aggressively to maintain momentum, according to data from Yuanta Securities. For example, foreign investors net-sold Kospi companies by 1.37 trillion won last week, but the index maintained its momentum, data from Yuanta Securities showed. Mr. Yu of Yuanta Securities said that the Kospi continues to hit record highs, supported mainly by domestic investors. “Individual investors have begun aggressively buying the market, and domestic institutional investors, including pension funds, have turned into net buyers.” Analysts argue that despite the rise, South Korea’s valuation remains attractive. “If you look at export-oriented South Korea and domestic South Korea, domestic South Korea has been underperforming for a long time,” Jayaraman said. “But if you look at Korean banks and the like, they’re trading at about half their book value, which is a very, very cheap multiple.”According to FactSet data, investors are paying 14.93 times the earnings that analysts expect the Kospi company to generate next year. By global standards, South Korea’s semiconductor leadership remains undervalued. According to Yuanta Securities, in terms of price-to-book ratio in 2026, the average stock price of other companies in the semiconductor industry around the world is 3.0 times, while Samsung’s price is 1.4 times and SK Hynix’s is 2.2 times. “In a world pivoting around AI, automation, and energy efficiency, South Korea’s valuation appears not only reasonable but potentially mispriced,” Yu said. “This rally is underpinned by fundamental improvements, not speculative excesses.” Risks and reality checks The rally in Korean stocks is not without risks. Market analysts said geopolitical tensions, uncertainty in US interest rates and domestic asset inflation could increase volatility. Yu added that fundamentals remain strong, but warned that foreign capital inflows into semiconductors are showing signs of drying up, prompting short-term volatility. Yang also cautioned that implementing reforms will take time. He said the current bull market is also supported by optimistic market expectations, particularly regarding technology revenue growth and trade policy outcomes, so any disappointment in these areas could trigger a pullback. However, few people expect a major reversal. South Korea’s combination of AI leadership, policy reform, and evaluation continues to provide a compelling case. “There are valuation tailwinds, a long-term AI growth story, and corporate governance reform, all of which are working together for South Korea,” Jayaraman said.
