invezz.com
The South Korean market index, the Kospi, has more than doubled over the past year.
A market long associated with low valuations and conglomerate discounts has turned into one of the strongest performers globally.
But this market rally has not been broad or random. It has been driven by a tight cluster of technology names tied to artificial intelligence and a surge in domestic investor activity that few global allocators fully appreciate.
South Korea is no longer just an export story linked to global trade cycles. It is now at the centre of a specific profit pool inside the AI value chain.
What changed in Korea’s market
Copy link to section
For more than a decade, South Korean equities traded at persistent discounts to global peers.
Corporate governance concerns, low returns on equity, and heavy dependence on cyclical exports kept valuations subdued.
The Kospi often traded at single digit forward earnings multiples.
However, the broad South Korean market index has more than doubled within the past twelve months, powered largely by semiconductor heavyweights.
Retail participation surged as a result, with brokerage cash deposits reaching roughly 109 trillion won, while margin loans climbed above 30 trillion won, both record levels.
At the same time, the Korean government introduced capital gains tax exemptions effective January 2026 for investors who sell overseas holdings and reinvest domestically for at least one year, according to the Ministry of Economy and Finance.
The policy was designed to encourage repatriation of funds, and Korean households hold around $170 billion in US equities.
A structural earnings story met strong local liquidity and explicit policy support.
Why memory is at the centre of the AI cycle
Copy link to section
Artificial intelligence is often discussed in terms of software models and cloud platforms.
The less visible part sits inside the server racks, because AI workloads require enormous amounts of high-bandwidth memory.
As models grow larger, memory density and speed become critical bottlenecks.
South Korea dominates this segment. SK Hynix and Samsung Electronics are two of the three global leaders in advanced DRAM and high-bandwidth memory.
SK hynix has positioned itself as a key supplier of HBM3E and next generation HBM4 products, with company guidance pointing to continued tight supply conditions through 2026 and 2027.
Samsung has reported improving yields on HBM4 and is moving toward mass production.
This is not a vague technology narrative. It is a supply and demand imbalance.
AI server deployment has accelerated faster than memory capacity expansion.
Building new advanced fabrication lines takes time and capital. When demand rises faster than supply, pricing power follows.
For memory producers, that translates into operating leverage.
In recent quarters, earnings revisions for these companies have reflected stronger pricing assumptions.
The rally is tied to rising profit expectations, not only multiple expansion.
Which companies are driving returns
Copy link to section
What investors need to note is that the index performance has indeed been concentrated.
Samsung Electronics and SK hynix account for a large share of the Kospi’s market capitalisation. When they move, the index moves.
SK Hynix has been one of the clearest beneficiaries of the AI memory cycle. Investors are pricing in sustained HBM demand and improved margins.
Samsung’s broader exposure across memory, logic and foundry adds another layer, although its memory division remains central to the current story.
Beyond these giants, smaller equipment suppliers, substrate makers, and materials companies listed on the Kosdaq have seen sharp moves.
Their revenues depend on capital expenditure by the large memory producers. When memory makers expand capacity or upgrade technology nodes, these upstream suppliers benefit.
The rally has not been evenly distributed across banks, consumer stocks or traditional industrial exporters. It is a technology and semiconductor driven move.
The role of domestic investors
Copy link to section
One of the most distinctive features of the Korean market is the scale and behaviour of its retail investors.
Individual investors have long been active participants, often using leverage.
In 2025, Koreans bought a record $32 billion of US equities on a net basis, according to Korea Securities Depository data.
Now there are early signs of rotation back into domestic champions.
Retail investors have increased purchases of Samsung and SK hynix, while foreigners have at times been net sellers during global risk off episodes, according to LSEG data.
High brokerage cash balances provide dry powder. However, record margin loans also increase volatility.
When sentiment is strong, leverage amplifies gains. When global tech stocks wobble, the same mechanism can accelerate declines.
For US and EU investors, this dynamic means that price swings in Korea can be sharper than in more institutionally dominated markets. Liquidity is deep in large caps, but flows can reverse quickly.
How this affects US and European portfolios
Copy link to section
The Korean surge does not replace US technology leadership. Nvidia, Microsoft and large US cloud providers remain central to AI infrastructure.
However, the memory segment represents a distinct profit pool. Investors seeking exposure to the hardware layer of AI may find Korean names offer a different risk return profile.
Valuations in Korea have historically traded below US peers. Even after the rally, the Kospi’s forward price-to-earnings ratio remains lower than those of major US indices.
Part of that discount reflects structural factors such as governance and capital allocation practices. Part of it reflects currency risk and geopolitical considerations on the Korean peninsula.
For European investors, Asian equities provide geographic diversification and exposure to the semiconductor supply chain without concentrating solely on US mega caps.
For US investors, adding Korean memory producers introduces currency exposure to the won and different regulatory frameworks, but also direct access to companies with global market share in a strategic industry.
There is also a broader implication. If capital continues to flow toward hardware suppliers, US software and platform stocks may face relative valuation pressure, even if their earnings remain strong.
The market often rotates within themes rather than abandoning them.
How durable is the current momentum
Copy link to section
The core of the Korean rally rests on one assumption. AI-driven memory demand will remain elevated long enough for producers to earn strong margins before new capacity catches up.
If hyperscale data centre investment continues at the current pace, that assumption holds.
If spending slows or supply ramps faster than expected, pricing could soften.
Competition from Micron adds another variable, although a three-player market can still sustain rational behaviour.
Domestic leverage is another factor. Record margin loans can magnify both gains and drawdowns.
Policy incentives may keep local participation high, yet they do not eliminate global risk.
South Korea’s equity market has moved from a discount story to an earnings momentum story in less than two years.
Investors who understand that the rally is tied to a specific bottleneck in the AI value chain can approach it with clearer expectations.
The market is rewarding companies that sit at the core of a hardware constraint. As long as that constraint persists, Korea remains central to the global AI trade.