AI ‘euphoria’ and EV bets drive South Korea market rally

South Korea’s $1.8tn stock market is approaching bull market territory, as foreign investors pile into AI stocks and local investors snatch up EV battery-related shares.

The tech-heavy Kospi has rallied 18 per cent this year, joining a surge of other indices in the region, including Japan’s Topix and Taiwan’s Taiex, that has been driven in large part by searing gains for chipmaker shares.

In contrast, Chinese stocks are falling over doubts about its economic recovery, with Hong Kong’s Hang Seng down 2 per cent this year and CSI 300, China’s key benchmark of onshore-listed companies, down 1 per cent.

Global funds bought a net Won12tn ($9.5bn) of Korean shares this year after a three-year hiatus, spending about Won10.5tn on Samsung Electronics stock.

The rally has been driven by technology hardware exporters, with foreign investors returning to emerging markets as concerns over the impact of the US Fed’s rate raising cycle ease. It follows a deep rout last year, triggered by rate hikes, high inflation and South Korea’s slowing economy.

Samsung Electronics, which accounts for over 20 per cent of the Kospi index, is the biggest contributor, surging nearly 40 per cent from a September low.

Fellow chipmaker SK Hynix also provided the second-biggest boost as overseas investors bet that the global AI race will fuel demand for chips, following the launch of ChatGPT in November and Nvidia’s recent rally.

“The AI-related euphoria served as a trigger for the chipmakers’ rally on top of growing expectations for the industry’s upturn in the second half,” said Lee Chai-won, chair of Life Asset Management.

Local investors are buying shares of companies that are part of the EV supply chain. Korean battery producers and manufacturers are expected to benefit from the rapid expansion of the global EV market and the US Inflation Reduction Act, which is aimed at curbing China’s control of the green energy sector.

LG Energy Solution, the world’s second-largest battery maker, has shot up 38 per cent so far this year, while steelmaker Posco Holdings, whose subsidiaries have made a series of upstream investments in the global battery supply chain, has rallied 42 per cent.

Shares of the country’s four biggest K-pop agencies — Hybe, SM Entertainment, YG Entertainment, JYP Entertainment — have all gone up by at least a third this year, double the Kospi’s advance and outperforming global recording labels such as Universal Music Group and Warner Music Group.

“There are still some macroeconomic risks but investors seem to think that the worst is over,” said James Lim, an analyst at US hedge fund Dalton Investments. “They are flocking to sectors with secular, structural growth regardless of the economic cycle, such as batteries, AI and entertainment.”

Lim added that Korean shares still remain largely cheap, with the Kospi index trading at a price-to-book ratio of below one times, compared with two times for Taiwan’s Taiex and Japan’s Nikkei index, and over four times for the US S&P 500 index.

But analysts also expressed caution, noting that Samsung Electronics and SK Hynix, which both produce advanced memory chips in China, have found themselves caught up in the intensifying tech rivalry between Washington and Beijing.

In a recent note, analysts from Fitch Ratings argued that the two chipmakers’ credit profiles “can absorb” recent measures including US export controls on advanced chip technology and a Chinese ban on chips made by US rival Micron.

However, they acknowledged that “more extreme rulings or bans” could impact Samsung and SK Hynix’s ratings.

Choi Joon-chul, head of VIP Research & Management, also argued that “some of the battery-related shares are overshooting their fundamentals,” noting they were being driven by demand from enthusiastic Korean retail investors.

“Foreign funds are flowing into the market again after heavy selling last year,” said Lee. “But there is a limit with this technical rebound, without improvements in fundamentals.”