Will South Korea’s epic bull market survive the energy shock?

IN HIS VICTORIOUS campaign for South Korea’s presidency last spring, Lee Jae-myung ran on the promise of “KOSPI 5,000”. As election pledges go, it was admirably specific. It also seemed like a long shot. At the time the country’s benchmark stockmarket index stood at half that, down from a peak of 3,300 or so in 2021. Yet by late January, less than eight months into his tenure, Mr Lee had kept his word. Within another month the KOSPI had burst through 6,000, making the slogan look unambitious. In the 12 months to the end of February the index rose by 138%, leaving all the world’s notable bourses in the dust. Nothing could stand in its way.

Except, that is, an energy shock. In the two trading days after America and Israel attacked Iran the KOSPI plunged by nearly a fifth, now outdoing other major indices on the way down. As a big energy importer, South Korea suffers whenever oil and natural-gas prices rise. With its habitual suppliers in the Gulf paralysed by war, the government has vowed to increase output at coal-fired power plants and cap prices for consumers. Foreign investors had already been cashing out before the war; big domestic ones have started joining in the sell-off. So is the KOSPI bull run kaput?

The relentless rally of the past 12 months was unusual by South Korean standards. The index had moved sideways for much of the previous decade (the global post-pandemic boom in 2021 aside). Its constituents were concentrated in stodgy export industries, such as carmaking, shipbuilding, armsmaking and consumer electronics. Many of them were being disrupted by cut-price Chinese competition. And they typically belonged to sprawling and opaque chaebol (family-controlled conglomerates).

The result was a lacklustre return on equity and a persistent “Korea discount” on KOSPI stocks. At the start of 2025 the index traded at a price-to-earnings ratio of just ten, compared with 15 for Japan’s TOPIX (which shares some of the same characteristics) and 25 for the S&P 500, the American blue-chip benchmark (which does not).

Investors’ enthusiasm for K-stocks over the past year can be explained by flaws suddenly turning into virtues. South Korean balance-sheets (heavy on assets) and products (low on obsolescence) typify the hot “HALO” trade. KOSPI firms’ capital intensity was seen as inefficient in a world being eaten by software. It is in vogue as companies are racing to build artificial-intelligence infrastructure, defence budgets are ballooning and the West and China are decoupling in critical products from EV batteries to LNG tankers.

These trends are still playing out. That explains why, despite the Iran-induced hiccup, the KOSPI has not reneged on Mr Lee’s campaign pledge. It also implies that South Korean stocks still have room to rise. Those rises are, though, likely to become choppier.

One reason is the KOSPI’s increasing concentration. Just two companies, Samsung Electronics and SK Hynix, account for two-fifths of its market value, up from about a sixth as recently as early 2025, and for more than two-thirds of its one-year returns. It is their soaring profits from memory chips, currently selling like Seoul’s hotteok hotcakes thanks to the AI boom, that have propelled the KOSPI to its heady heights. And these profits are prone to booms and busts like the rest of the semiconductor industry.

Second, the South Korean stockmarket has become more popular with domestic retail traders. The number of active trading accounts and their users’ deposit balances with brokers have both mushroomed. Many are funding their bets with borrowed money. Margin lending, in which investors use loans from brokers, hit a record 34trn won ($23bn) in early March, up from 18trn won the year before. Offshore leveraged exchange-traded funds offering South Koreans beefed-up exposure to Samsung or SK Hynix have seen billions of dollars in inflows this year. All this amplifies gains, but also losses.

Given KOSPI companies’ bright prospects, foreign and domestic smart money may yet stage a return. Wall Street strategists point out that South Korea’s stockmarket looks much less crowded than a month ago. It continues to look pretty cheap, too. Corporate-governance reforms, akin to those that have helped Japanese valuations in recent years, enjoy bipartisan support. Once the energy shock dissipates, the KOSPI’s wild ride could resume. But investors should prepare for it to be bumpier than ever. ■