Author: Yuanchuan Investment Review

The recent performance of South Korean stocks is comparable to the "ten-loop roller coaster" at Chimelong.

At the end of February, the conflict between the US, Israel, and Iran broke out. Global stock markets weathered the first trading day of March 2, amid expectations of a rapid escalation of tensions with Iran. However, the South Korean stock market was closed for the entire day due to a holiday.

By the time it reopened on March 3, the expectation of a "quick and easy" resolution to the Middle East situation had completely reversed. The blockade of the Strait of Hormuz directly led to chaos in the global oil and gas market, while the South Korean KOSPI index, which had been a hot performer since the beginning of 2026, plummeted into a relentless decline.

On March 3, the South Korean KOSPI index once triggered a circuit breaker, ultimately falling by more than 7%. It continued to fall the following day, triggering another circuit breaker, and closed with a single-day drop of 12.06%, marking the largest drop in its history.

On the evening of March 4, the Financial Services Commission of South Korea announced the immediate injection of 100 trillion won (approximately US$68 billion) into the financial market stabilization fund to rescue the market. The following day, the KOSPI rebounded sharply by 9.63%.

But the volatility didn't stop there. This week, the South Korean stock market continued its extreme swings, much like a manic-depressive disorder. It fell nearly 5.96% on Monday and then rose 5.35% on Tuesday, resulting in further losses. This provided another lesson in the fundamentals of investment theory, "volatility decay," for all investors hoping for a violent rebound.

Meanwhile, statistics from the Korea Exchange also revealed an interesting phenomenon. Since March, South Korean retail investors have been net buyers, while foreign investors have been net sellers. This seems to be a repeat of the phenomenon seen during the 2020 pandemic, where the greater the volatility, the more hesitant foreign investors became, and the more stubborn retail investors became.

Before the recent sharp rise and fall, the South Korean stock market was enjoying an unprecedented upward cycle. The KOSPI rose by more than 160% from 2025 to the end of February this year, making it the MVP of the global market. In this so-called most bull market, the KOSPI doubled from 3,000 points to 6,000 points in a shorter time than the Nasdaq's fastest record in history[10].

This astonishing explosive power, combined with the extreme fluctuations during the crisis, constitutes the complex nature of the South Korean stock market.

Black Swan Eve

The curve clearly shows that the rise in South Korean stocks actually began after the trade war bottomed out in April last year.

At that time, global markets were trembling over Trump's previous round of tariffs on TACO. After falling by more than 7% in early April, KOSPI began to climb out of the trough and gradually rise. Even the brief pullback in November was seen by the enthusiastic market sentiment as a signal of "reversing to pick up people".

The resurgence of the Korean fever has become even more unstoppable since the beginning of 2026. KOSPI almost achieved the annual KPI of others in January, and although the volatility increased in February, the upward trend continued to accelerate.

On the first trading day of February, the KOSPI retreated by 5.26%, the largest pullback in this previous rally. However, the external environment was relatively stable at the time, and this "stress test" was quickly recovered through a volatile upward trend. On February 25, the KOSPI broke through the 6000-point mark for the first time. On the last trading day of February, the KOSPI reached a high of 6347.41 points intraday before retreating, closing down 1% for the day.

The rapid rise is not without reason; it perfectly aligns with the fundamental principle that higher concentration leads to greater elasticity.

In terms of index composition, although KOSPI is officially called the Korea Composite Stock Price Index, it is essentially a highly concentrated "sector bettor". The market capitalization of the two memory chip giants, Samsung and SK Hynix, accounts for one-third of the Korean stock market, and the rise of KOSPI is almost entirely driven by these two core weighted stocks.

Before March, KOSPI was a highly pure AI mapping. As long as Samsung and SK Hynix continued to face chip shortages while increasing their Capex investments, they essentially held the new oil of the AI era in their hands.

Whether it's the ever-increasing demand for HBM (High Bandwidth Memory), a high-end product needed to produce large AI models, or the supply contraction of DRAM/NAND, a traditional consumer electronics product, due to erosion of production capacity, both are making storage the most popular wealth code in 2026.

From the end of 2025 to the beginning of 2026, Samsung and SK Hynix's main external activity was announcing price increases. Starting from Q3 2025, DRAM/NAND contract prices were significantly raised for three consecutive quarters. HBM4, which is still in the mass production ramp-up stage, is an even more thorough seller's market. The production capacity for 2026 has already been divided up by major AI companies, and even those with more money can only wait in line for 2027.

However, when the world realized that the turbulent Gulf would cut off stable supplies of real oil, the grand narrative of the future quickly lost out to the immediate energy supply disruption. South Korea, in particular, which is heavily reliant on Middle Eastern oil and gas resources, went from the FOMO narrative of being the "king of AI mapping" to the HALO anxiety of being a "victim of high oil prices" overnight.

In the first two trading days after the start of March, Samsung and SK Hynix both fell by about 10% for two consecutive days.

In fact, on the eve of this "black swan" event, there was already a divergence between domestic and foreign capital in South Korea. In February, the average daily turnover of South Korean stocks reached 32.23 trillion won (approximately 149.2 billion yuan), 19% higher than in January, with both the index and trading volume hitting record highs.

From a technical analysis perspective, a new high with increased volume is a classic "mutual signal".

Since May of last year, foreign investors have generally maintained a net buying trend in the South Korean stock market. However, after the South Korean stock market hit 6,000 points, they began to close out their positions in large quantities. Net foreign selling in February also reached a record high of 21.1 trillion won (approximately 99.8 billion yuan). On February 27th alone, the day the KOSPI index hit a new intraday record high, net foreign selling amounted to 7 trillion won (approximately 32.4 billion yuan).

However, those who cashed out their profits probably didn't expect that the structurally unbalanced South Korean stock market would pay such a heavy price because of the "epic wrath" and "real promises" from the Middle East.

Self-help for students who excel in one subject but are weak in another

Such large fluctuations in the stock market raise the question: what is the historical volatility of the South Korean stock market?

In fact, among the four major Asia-Pacific stock indices (CSI 300, Hang Seng Index, Nikkei 225, and KOSPI) over the past decade, the CSI 300 had an annualized volatility of 18.12%, the KOSPI was 18.90%, while the Nikkei 225 ranked second at 20.50%. The Hang Seng Index topped the list with a volatility of 21.79%, which is not entirely unexpected.

Before 2025, KOSPI only experienced one major fluctuation in 2020, and the situation at that time was similar to that in March of this year - the Korean stock market was driven to a low point by a large-scale sell-off by foreign investors, and the market was driven up by local retail investors buying at the bottom.

Accompanying South Korea's low volatility for many years has been the awkward "Korean discount".

Over the past decade, the overall price-to-book ratio of the South Korean stock market has hovered around 1, with occasional slight improvements followed by a return to low levels. It was not until the meteoric rise since last year that it reached a high of 2 in February of this year.

Even though the South Korean stock market has limited overall appeal, with only Samsung and SK Hynix attracting significant market attention, its overall price-to-book ratio is typically around 2.4, compared to the Taiwanese stock market, which is also a semiconductor sector index.

The "Korean Discount" can also be understood as a collective negative assessment of the South Korean stock market by global investors. The problem is not just that the index is too unbalanced, but also that the governance models of large listed companies do not meet the aesthetic standards of contemporary investors.

Both Samsung and SK are typical South Korean family-owned conglomerates with opaque governance. Often, to avoid hefty inheritance and dividend taxes, they suppress stock prices, withhold dividends, or use cash reserves for reckless diversification. All of this has made the South Korean stock market notorious for its stinginess towards minority shareholders.

The three most recent South Korean presidents have all included "solving the issue of South Korean devaluation" as one of their agenda items during their terms.

Former South Korean President Moon Jae-in encouraged institutional investors such as the National Pension Service (NPS) to actively participate in corporate governance, attempting to address the problem of low valuations from a fundamental perspective by restricting cross-shareholdings by conglomerates and increasing the rights of minority shareholders.

Former South Korean President Yoon Seok-youl launched the "Corporate Value Enhancement Plan," attempting to revitalize the market through tax cuts, encouraging voluntary disclosure, and dividends. However, due to political turmoil in April 2025, the "Han Special Valuation Plan" came to an abrupt end.

In June 2025, incumbent President Lee Jae-myung will take office. During his campaign, he called for sweeping reforms to the capital market, and one of his campaign slogans was to push the Korea Composite Stock Price Index (KOSPI) to 5,000 points.

As a former seasoned retail investor (who suffered losses), Li Zaiming has always been resentful that the unfair transactions by major shareholders have repeatedly amplified the losses of ordinary investors.

After taking office, he forcefully implemented a series of reform measures, including but not limited to: mandating the cancellation of treasury shares used by chaebol families to maintain control; strengthening the accountability system of the board of directors; reforming the dividend tax to encourage listed companies to pay dividends; and promoting the relocation of residents' wealth, setting the tone to guide South Koreans to shift their assets from excessive real estate speculation to more financial asset allocation.

Lee Jae-myung likes to emphasize in public that he was once a big retail investor and claims that when his political career ends, he will put his energy back into stock market trading.[11]

Whether driven by top-level design needs or personal preferences, Lee Jae-myung's enthusiasm for reforming the South Korean stock market has enabled him to fulfill his campaign promise of reaching 5,000 points on the index. In fact, even considering the significant volatility of the past two weeks, the Korea Composite Stock Price Index (KOSPI) has still risen by more than 100% in less than a year since he took office.

Before the Gulf crisis, Lee Jae-myung’s stock market reforms received a lot of attention. Bloomberg wrote a special report titled “How the South Korean president made the South Korean stock market the best in the world” and said that the bull market made Lee Jae-myung a hero in the eyes of South Korea’s 14 million retail investors[11].

Of course, this report was published on February 22, 2026, when ships were still passing through the Strait of Hormuz normally, investors were still debating the future of AI based on Citrini's "The Smart Crisis of 2028," and oil prices were still calmly hovering around $60.

end

If Lee Jae-myung's stock market reforms aimed to address the issues of "rules" and "distribution," attempting to repair the long-standing problem of depressed valuations, then the Middle East conflict instantly destroyed the profit expectations that served as the denominator, abruptly shifting the market's attention directly from long-term dividends and governance back to short-term inflation and survival.

This sense of division exposes a harsh reality: the reform boom is actually built on the assumption of a relatively stable global macroeconomy. Once the timeline of the Gulf conflict is extended, it directly hits the Achilles' heel of South Korea as a resource-poor exporting country with an economic structure that is overly concentrated in a few industries.

In an open market, the inflow of capital, whether driven by industrial advantages or expectations of reform, can flow out during a crisis. Especially when global risk aversion erupts and foreign investors hold substantial profits, it's an instinctive arbitrageur to reduce their holdings of the most appreciating and liquid assets.

To some extent, this is a volatility that cannot be avoided in a highly open market, and it is also a completely new issue of expectation management.

If you don't believe me, look at the Hong Kong stock market next door. It has a relatively diverse industrial structure and relatively advanced corporate governance, but when it is treated as an "ATM," it can fall just as sharply.

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