Korea – the comeback king, but where to from here?

On 3 December 2024, South Korean President Yoon Suk Yeol declared martial law – a move that plunged the country into its deepest political crisis since the transition to democracy in the 1980s. Within hours, citizens flooded the streets in protest, parliament overturned the declaration, and Yoon was swiftly impeached. The constitutional court confirmed his removal in April 2025, and new elections in June brought Lee Jae Myung to power.

Against this backdrop of extraordinary political turbulence, few would have predicted what happened next: a market boom of historic proportions. From the moment of Yoon's ill-fated declaration to the time of writing, the KOSPI – Korea's benchmark equity index – has surged 114%, making it easily the best-performing major index in the world over the period (Figure 1).

Korea's weight within the MSCI Emerging Markets Index has effectively doubled between December 2024 and February 2026 (Figure 2), catching underweight managers badly off-guard.

POWERING THE AI BOOM

At the heart of Korea's rally are its two most valuable companies: Samsung Electronics and SK Hynix. These two firms have become indispensable to the artificial intelligence revolution. They are the world's largest producers of memory chips – NAND and DRAM – products that were once commoditised and prone to vicious price cycles. That dynamic has changed dramatically.

As the computing and memory demands of AI servers have exploded, the memory market has shifted from surplus to shortage. High Bandwidth Memory (HBM) – a critical component in AI data centres – has absorbed available capacity industry-wide. Until recently, only SK Hynix and US-based Micron produced a chip certified for use by NVIDIA (HBM3). The latest generation, HBM4, is now in production, with both SK Hynix and Samsung Electronics earning certification. The AI revolution, quite simply, cannot happen without their products – and share prices have responded accordingly (Figure 3).

These gains have reshaped the composition of the Korean market. Samsung Electronics and SK Hynix now account for roughly half the weight in MSCI Korea, up from around 36% before the martial law episode. When Samsung Electronics' separately listed preferred shares and SK Hynix's holding company SK Squared are included, the effective exposure approaches 60% (Figure 4).

CLEANING HOUSE

The second pillar of Korea’s recovery is a story of long-overdue housekeeping. Korea has historically been dominated by a handful of powerful family-controlled conglomerates – known as ‘chaebols’ – whose cross-shareholding structures insulated them from minority investor pressure and allowed capital to sit idle rather than be returned to shareholders. Scandals occasionally toppled executives, but consequences rarely lasted. The result: a market that consistently traded at a deep discount to its emerging market peers and, more starkly still, to developed markets. For most of the period since the Global Financial Crisis, the KOSPI hovered near book value – a quiet indictment of poor returns on equity.

A "Value Up" programme to address these issues was already in place under the former president. The new government sharpened its ambition, setting a target of pushing the KOSPI to the 5 000 level – one achieved earlier this year. The key reforms underpinning this effort include:

• Directors' duty of loyalty expanded to cover shareholders, not just the company
• Minimum one-third independent directors on boards
• Capped voting rights for controlling shareholders in audit committee elections
• Virtual attendance mandated for shareholder meetings
• Cumulative voting to protect minority shareholder influence
• Increase to two separately elected audit committee members

Changes to the capital gains tax regime and incentives for Korean investors to repatriate offshore holdings into domestic equities added further momentum – helping 2025's strong performance spill into 2026, with retail investors piling in through leveraged ETFs.

Part of the government's motivation is structural. Korean households hold roughly three-quarters of their wealth in real estate (Figure 5) – well above comparable high-income countries – leaving them dangerously exposed at a time when the population is shrinking and property values face demographic headwinds.

WHERE TO FROM HERE?

Given that Samsung Electronics and SK Hynix together represent close to 60% of the Korean index, the market's direction will largely track their fortunes. The near-term supply picture for memory remains tight, but we do not expect that constraint to persist indefinitely. Any pullback in capital expenditure by the US hyperscalers would quickly translate into weaker demand for HBM and related products. History is not encouraging: this has always been a deeply cyclical industry, and once supply normalises, pricing tends to revert sharply. With Samsung Electronics and SK Hynix each expected to spend around US$20bn in capital expenditure in 2026 – elevated by historical standards – supply will eventually catch up.

The more durable story is governance. The current government's commitment to reform looks genuine, and the gains made – in board accountability, capital returns, and minority shareholder protection – appear unlikely to be reversed. For stocks outside the chip complex, where governance and capital allocation are quietly improving, the re-rating may prove more lasting than the market currently credits.

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