South Korea’s stock market has been weakening amid a global rally fueled by interest rate cuts by the U.S. Federal Reserve and China’s aggressive stimulus measures. With stocks plunging faster during downturns and rebounding less than their global counterparts during upswings, more investors are pulling their money out of the country.
The benchmark KOSPI stock index gained 6.5% in the past year, placing it among the worst-performing stock markets in the world, according to the Korea Exchange on Oct. 3. Even Israel’s stock market fared better with a 13.8% gain. The small-cap KOSDAQ dropped 5.6% during the same period.
Korea’s stock market has struggled to gain momentum despite several global tailwinds, including the artificial intelligence (AI) boom in the first half of the year and recent interest rate cuts and economic stimulus measures in the second half.
Experts suggest the problem lies in the market’s heavy reliance on specific sectors, such as semiconductors. Political uncertainty surrounding the financial investment income tax, set to be implemented next year, is further dampening investor sentiment.
Global stock markets have been rallying on the back of U.S. rate cuts and China’s stimulus. The U.S. stock market racked up record highs last week, and Chinese stocks rose by 25% in six days, making up for over a year of sluggish performance in a week. Stock markets in Japan, Taiwan, Germany, and India have all continued their bullish streaks, and Southeast Asian markets, including Indonesia, hit new highs last month.
South Korea stands out as an exception. After approaching 2,900 points in early July, the KOSPI has since tumbled to around 2,500. The KOSPI struggled to recover even after global stocks plummeted on Aug. 5 due to U.S. recession fears. Since August, the KOSPI has edged up just 5%, trailing behind major markets that have rebounded 10% to 20%.
“The problem is that there is no sign of improvement on the horizon, not enough positive news to drive recovery,” said an industry insider.
A strong stock market typically relies on robust corporate profits, but recent earnings forecasts paint a bleak picture. According to financial market tracker FnGuide, third-quarter operating profit estimates for 249 publicly traded companies tracked by brokerages have fallen to 69.18 trillion won, down roughly 3 trillion won from a month earlier.
The semiconductor sector, a heavyweight in the KOSPI with Samsung Electronics and SK Hynix together accounting for 23% of the index’s market cap, has been particularly hard hit. Investment banks are slashing the price targets of Korea’s leading chipmakers, with Morgan Stanley lowering Samsung’s target to 70,000 won and Macquarie cutting it further to 60,000 won. Following such grim forecasts, Samsung Electronics shares dropped below 60,000 won for the first time in 18 months on Oct. 2.
“Foreign investors perceive the Korean market primarily as a ‘semiconductor market,’ so concerns about a ‘semiconductor winter’ are driving them to sell Korean stocks,” said an analyst based in Seoul.
Experts warn that the Korean stock market lacks new capital inflow. The average daily trading volume fell to 1.5 billion shares this year, the lowest in five years since 2019, according to the Korea Exchange.
The prolonged debate over introducing the financial investment income tax has kept wealthy investors on the sidelines, while retail investors are turning to overseas markets like the U.S. Retail investors absorbed foreign and institutional sell-offs during the 2020 pandemic, but they are no longer investing in Korean stocks. Retail investors have offloaded 8.4 trillion won worth of KOSPI stocks this year.
The much-anticipated boost from the value-up index has yet to materialize. Contrary to expectations of “high-dividend-low-valuation” stocks, the market is dominated by “low-dividend-high-valuation” stocks, a far cry from profitability and stability.
The Korean market’s structural issues run deeper. Experts note that the country has failed to foster next-generation companies capable of attracting global investors, unlike longstanding such as Samsung Electronics and Hyundai Motor Company. Samsung has held the top spot in market capitalization for 25 years, reflecting a lack of dynamism.
In contrast, Taiwan has seen its market leader shift from iPhone manufacturer Foxconn to chipmaker TSMC, while India’s leading stocks now include tech companies and financial firms like Reliance.
