Investors bet on AI and governance reforms, South Korean stock market hits a record high

Under the global AI boom and corporate governance reforms, South Korea's benchmark stock index has set intraday records 16 times this month, with an increase of 72% this year.

The KOSPI index has continuously broken historical records this month, driven by the AI-driven chip stock boom and corporate governance reforms, having set 16 intraday highs just in October, with an increase of nearly 21%, and surpassing the 4,000-point mark.

This surge has led to a cumulative increase of over 72% for the KOSPI this year, far exceeding the 26% increase of Japan's Nikkei 225 index. Samsung Electronics and SK Hynix both reported strong earnings this week, further boosting market confidence, with the combined market value of the two companies exceeding 1,000 trillion won, accounting for over 30% of the total market capitalization of the KOSPI index.

Analysts indicate that the strong performance of the South Korean stock market not only reflects the momentum of the global AI wave, but also benefits from the structural reforms aimed at eliminating the "Korea discount" that are steadily progressing. Although foreign investors net sold 13.7 trillion won worth of South Korean stocks last week, active buying by domestic investors has kept the KOSPI index on an upward trajectory.

Market experts point out that despite the significant rise, the valuation of the South Korean stock market remains attractive, with a KOSPI index price-to-earnings ratio of 17.65 times, lower than the Nikkei 225 index's 25.86 times, but the effectiveness of reforms, geopolitical risks, and uncertainties regarding U.S. interest rates may bring volatility.

AI Chip Boom Leads the Surge

The recovery of the AI-driven semiconductor industry is the core driving force behind this surge. Arjun Jayaraman, portfolio manager at Causeway Capital Management, stated,

"AI is a long-term growth driver for the next few years, and this cannot be ignored; Samsung and SK Hynix are at the core of this growth."

According to a previous article from Wall Street CN, SK Hynix reported record quarterly revenue and profit on Wednesday, benefiting from strong demand for high-bandwidth memory used in generative AI chips, with its stock price having risen more than twice this year. Samsung Electronics' earnings report released on Thursday showed that operating profit more than doubled quarter-on-quarter, driven by a rebound in the chip business, with its stock price increasing by over 96% this year.

Daniel Yoo, head of global asset allocation at Yuanta Securities, pointed out, "The main driving factors behind this surge are the recovery of the memory chip industry and the resulting upward revision of corporate earnings expectations."

Strong earnings expectations from key companies like Samsung and SK Hynix have boosted investor sentiment, and the expectations of a super cycle triggered by the global shortage of memory chips have further fueled the momentum.

Governance Reforms Reshape Investment Value

In addition to the semiconductor industry, policy shifts and corporate governance reforms are reshaping South Korea's investment attractiveness. Regulators and lawmakers are increasingly promoting shareholder-friendly practices, narrowing the valuation gap between South Korean companies and their global peers through "value enhancement plans."Invesco portfolio manager Fiona Yang stated, "Due to factors such as poor corporate governance and low shareholder returns, Korean stocks have historically traded at a significant discount relative to global and regional markets, often referred to as the 'Korean discount'."

FactSet data shows that the Kospi's price-to-earnings ratio is 17.65 times, while the Nikkei 225 index is 25.86 times.

The "Corporate Value Enhancement Plan" launched in 2024 is widely regarded as Korea's version of Japan's corporate governance reform, aimed at enhancing valuations by encouraging listed companies to improve shareholder returns and governance.

The plan includes tax incentives for participating companies, particularly those that increase dividend payouts or buybacks, and encourages companies to use excess cash for dividends, buybacks, and business restructuring.

Michelle Kam, investment strategist at Standard Chartered Bank's Chief Investment Office, stated, "Expectations that the government's 'Corporate Value Enhancement Plan' will eliminate the long-standing 'Korean discount' and boost stock market performance have supported this round of gains."

Yang added, "If regulators continue to commit to these value enhancement initiatives, the market may maintain its upward momentum."

Domestic Investors Take Over from Foreign Capital

Although foreign investors ignited this year's rally, domestic investors have taken the baton.

According to Yuanta Securities, foreign institutional investors were the first to buy large tech stocks at the end of last year, driving the early gains, but subsequently, domestic institutions and individual investors actively intervened to sustain momentum.

Despite foreign investors net selling 13.7 trillion won of Kospi stocks last week, the index continues to maintain its upward trend. Yoo stated:

"The Kospi continues to hit historical highs, largely supported by domestic investors. Retail investors are actively buying on dips, and domestic institutional investors, including pension funds, have also turned to net buying."

This shift in investor structure has enhanced market stability and reduced reliance on foreign capital flows. Domestic investors' confidence in the reform dividends and the reassessment of long-underestimated assets have become key factors supporting the market's continued rise.

Valuations Remain Attractive

Despite significant gains, analysts believe that the valuation of the Korean stock market remains reasonable. FactSet data shows that investors are paying a multiple of 14.93 times for the expected earnings of Kospi companies in the next fiscal year.

Measured by global standards, leading Korean semiconductor companies are still undervalued. According to Yuanta Securities, based on the price-to-book ratio for 2026, Samsung Electronics is at 1.4 times, SK Hynix is at 2.2 times, while the average for global semiconductor peers is 3.0 times.

Jayaraman pointed out:

"If we separate export-oriented Korea from domestic-demand-oriented Korea, the latter has underperformed in the long term. However, looking at assets like Korean banks, they are trading at about half of their book value, making valuations extremely cheap."

Yoo stated:

"In a world repositioning around AI, automation, and energy efficiency, Korea's valuations are not only reasonable but may also be mispriced. This round of gains is supported by fundamental improvements rather than excessive speculation."It is worth noting that analysts also pointed out that geopolitical tensions, uncertainty in U.S. interest rates, and domestic asset inflation could bring volatility.

Yoo warned that foreign capital inflows into the semiconductor sector show signs of fatigue, which may lead to increased short-term volatility, although he added that the fundamentals remain solid.

Yang stated that the current upward trend is also driven by optimistic market expectations, particularly regarding the earnings growth of technology companies and the outcomes of trade policies, so any disappointment in these areas could trigger a pullback