South Korea's Kospi Index Drops 20% Amid High Expectations for Chip Giants Samsung and SK Hynix
South Korea's leading stock index, the Kospi, has fallen 20% since June 22, following a year in which it more than doubled in value. Aryeh Tal, head of research and modeling at Bank Leumi's capital markets division, attributes this sharp volatility primarily to the performance of two companies, Samsung and SK Hynix, which together constitute 55% of the index. While the local semiconductor industry benefits from strong AI demand, Tal explains that inflated investor expectations have created a high benchmark that often leads to disappointment.
The Kospi, valued at approximately $3.5 trillion, is about nine times larger than Israel's TA-35 index. Over the past year, it surged over 100%, outperforming other Asian markets such as Taiwan and Japan. Samsung, a technology conglomerate controlled by the Lee family, and SK Hynix, a major memory chip supplier to companies like Nvidia, have driven this growth. SK Hynix recently listed on the US stock market as a mirror to the Korean exchange.
Tal notes that investing in the Kospi is effectively a leveraged bet on memory chips and AI, as these two companies dominate the index. Despite strong economic growth in South Korea, around 2.5% per capita annually, and a broad industrial upswing, the stock market's fortunes hinge heavily on these chipmakers. SK Hynix's stock rose over 500% and Samsung's over 300% in the past year due to soaring chip division profits amid a supercycle of AI investment and record chip demand.
However, despite Samsung reporting a nearly 19-fold increase in operating profit in Q2 and beating forecasts, investors punished the stock. Tal explains this as a result of "excessive expectations" and a market saturation point, with investors engaging in "selling the news" amid concerns about potential chip overcapacity in coming years. This has triggered a massive outflow of $64 billion in foreign investment from the Korean stock market since the start of the year, including $30 billion in June alone, with funds moving to less concentrated and more defensive markets like Japan, Hong Kong, and the US.
Looking ahead, Tal offers cautious optimism for Israeli investors. The recent declines have made price-to-earnings multiples more attractive historically, around 5-6 times earnings projected for 2027, compared to 16 times in Taiwan and over 20 times in Nasdaq. Major financial institutions like Goldman Sachs and JP Morgan forecast the Kospi could reach 9,000 points within a year, up from about 7,300 currently. However, Tal warns that investors must monitor demand resilience and foreign capital flows closely, especially given rising inflation pressures from energy imports and expected interest rate hikes from 2.5% to 3% over the next year. He also stresses that direct exposure carries risks due to the index's concentration and sensitivity to earnings expectations for these leading companies.
Tal concludes that while Israeli exposure to Korea is currently limited and mainly through ETFs and mutual funds, the improved valuations support investment for those confident in ongoing chip demand growth. Nonetheless, investors should remain vigilant about market volatility and macroeconomic factors.
Summary: South Korea's Kospi index has dropped 20% since June after a year of rapid gains driven by chipmakers Samsung and SK Hynix, which dominate the index. Despite strong earnings, investor expectations have led to volatility and significant foreign capital outflows. Cautious optimism exists for investors due to more attractive valuations and positive forecasts, but risks remain from market concentration, inflation, and interest rate increases.
