SK Hynix, Samsung Lead South Korean Kospi Bull Run

South Korea’s Kospi has made a remarkable recovery from its recent downturn, re-entering bull market territory as investors flock back to the nation’s dominant semiconductor giants, which are the linchpins of the index.

The benchmark has surged by over 20% from its July low, the widely accepted benchmark for a bull market. This rebound follows a sharp decline that saw it dip into bear market territory last month, a fall partly attributed to leveraged positions and forced selling.

The swiftness of this reversal highlights the inherent volatility within the tech stock landscape and prompts a critical question: how sustainable is this South Korean rally?

For optimists, the longevity of this uptrend hinges on whether the underlying fundamentals of Korea’s semiconductor powerhouses can keep pace with increasingly bullish investor expectations. Robust earnings from U.S. technology firms and sustained investments in AI infrastructure have rekindled confidence in the persistent demand for memory chips.

“The AI rally and consistently strong earnings have been a constant throughout the sell-off. Therefore, it’s the fundamentals that are guiding the market back to normalcy, rather than the other way around,” commented Peter Kim, head of global investment strategy at KB Securities. “Valuations and earnings were never truly in question during the semiconductor rout, which was primarily driven by technical factors and fund flows. The unwinding of leveraged positions has also been mitigated after regulators tightened rules and brokerages normalized margin and risk requirements.” This could place the market on a more stable footing compared to the lead-up to the previous correction.

The Kospi’s heavy reliance on a select group of semiconductor companies means its bull run is intrinsically linked to the sentiment surrounding Artificial Intelligence (AI). The market’s fortunes are, to a significant extent, tied to the trajectory of AI hardware development and adoption.

“At this juncture, Korea’s equity market is virtually synonymous with the AI hardware trade,” observed Phillip Wool, head of research at Rayliant Global Advisors. “The rebound has been partly technical, as forced selling subsided, dip buyers re-entered the market, and the fear of missing out gained traction. However, stronger-than-anticipated earnings from Big Tech have also bolstered expectations for AI infrastructure spending, driving upward revisions to growth forecasts for Korean hardware companies.”

Wool further elaborated, “Any factor that challenges this narrative, whether it’s cautious capital expenditure guidance from hyperscalers, declining token pricing in AI models, or renewed fears of Federal Reserve tightening, could trigger a pullback. We should anticipate continued volatility as long as there is uncertainty surrounding the ultimate scale and impact of AI hardware spending.”

bolstering the bull case, Billy Leung, an investment strategist at Global X ETFs, pointed to South Korea’s corporate governance reforms and its “Value-Up” program. These initiatives have been instrumental in addressing and reducing the long-standing “Korea discount,” which refers to the persistent tendency for South Korean companies to trade at lower valuations than their global peers.

“While the Kospi is indeed in a bull market, the more pertinent question is whether this rally is fueled by speculation or by a genuine improvement in underlying fundamentals,” Leung noted. He believes Korea is leaning more towards a fundamentally supported bull market rather than a speculative bubble, with semiconductor earnings expectations continuing their upward trend. However, he also cautioned that the elevated retail participation, significant index concentration, and ambitious market targets are beginning to exhibit characteristics of late-cycle market behavior.

Other market observers advised against overemphasizing the 20% milestone as a definitive marker of a new, sustained bull market. “I would exercise caution in describing this as a completely new bull market,” stated Jung In Yun of Fibonacci Asset Management Global. He views the current rebound as a combination of a technical recovery from the effects of forced selling and a “genuine return of stability.”

Yun’s base case anticipates the broader bull trend to persist, supported by semiconductor earnings and an improved risk appetite, albeit at a more measured and potentially uneven pace. “Following such a steep rebound, some degree of consolidation would be healthy. Investors should not expect the market to sustain the same rate of growth from this point forward.”