In recent weeks, South Korean regulators have sounded Greenspan-like warnings for retail investors. On June 23, Kospi suffered a “Black Tuesday”, with the index plunging 10%, fuelled by a warning from officials to retail investors against toxic leveraged single-stock ETFs. Yet, since earnings are still growing strongly, investors are now back to chasing growth stocks again.
Over the past 18 months, the Seoul bourse has nearly quadrupled. As I wrote in my column “How the AI boom is creating memory chip shortages” in February, South Korea is a huge beneficiary of the AI boom, mostly because it is home to two of the three global memory chip giants, SK Hynix and Samsung Electronics, which, along with US-based Micron, control 94% of the global memory chip market.
Though they are both valued at around US$1.4 trillion ($1.81 trillion) each, SK Hynix is a bigger winner because it is a pure-play memory player and the leader in HBM, or high-bandwidth memory, used in data centres with AI chips made by Nvidia and others. Samsung Electronics, on the other hand, also makes smartphones and other consumer electronics, and runs a chip foundry.
As AI moved from training large language models to inferencing and reasoning over the past two years, demand for HBM chips grew, which in turn created shortages not only of AI-focused chips but also a range of other memory chips that are used in smartphones, PCs, electric vehicles and a range of consumer electronics. Since memory producers carry high operating leverage, price gains translate into outsized bottom-line growth. Memory chip firms that once had gross margins of around 35% now have margins of over 80%.
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Moreover, chip makers’ shift to three- to five-year long-term supply agreements will likely keep profitability elevated for longer than the market is currently pricing. Korean memory stocks still trade at single digit price-earnings multiples — a level that suggests earnings sustainability may not yet be reflected in stock prices.
SK Hynix and Samsung Electronics now make up 56% of Korea’s benchmark Kospi index. The Kospi is up 292% since the start of last year, while shares of Samsung Electronics are 410% higher and those of SK Hynix are up a whopping 1,460%. Compare Seoul’s spectacular rally with the Southeast Asian bull run in 1993. The Kuala Lumpur Composite Index was up 98.04%, and Singapore’s Straits Times Index rose 59% that year.
The latest Korean rally is vastly bigger in size and scale. While the Southeast Asian bubble burst quickly in early 1994, Korean chip makers are still trying to keep up with burgeoning demand, which in turn is pushing up prices, fattening the companies’ bottom lines and prompting retail investors to load up on stocks.
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For Koreans, the recent market rally has been a once-in-a-lifetime experience. I worked in Seoul as a financial journalist for three years and still visit the city regularly to meet friends and former colleagues. It took nearly 19 years since the Seoul bourse began trading in 1956 for the Kospi to rise from 1,000 to 2,000 points, and another 13 years to reach 3,000. For the 38 years since, the market hasn’t gone up much. Indeed, it has mostly gone sideways or down. The recent jump from 4,000 to 9,000 points took just eight months.
Goldman Sachs’ Asia strategist Timothy Moe, in a report last month, noted that South Korea was the firm’s “highest-conviction market in the region”. He added that earnings growth this year at 300% is the strongest for any market in Asia ever, with the exception of the 1999 recovery from the Asian Financial Crisis, when many economies and profits were initially devastated.
Not surprisingly, Koreans are flocking to the market and buying stocks hand over fist. Everyone in the greater Seoul area, where about half of South Koreans live, seems to be trading stocks these days. If you walk around Gwanghwamun, Seoul’s downtown business and entertainment district, you will see Koreans — young and old — furiously thumb-typing market orders on their smartphones.
Nearly 60% of adult Koreans now own stocks, compared with over 62% ownership of stocks in the US and 34% in the UK. Over the past year, 20 million new brokerage accounts have been opened in the country. Average daily volumes on the Korea Exchange, or KRX, have more than doubled this year. Daily retail trading volumes are up 220% since January. Margin-based investment by retail traders was up 72.5% last year and has more than doubled this year.
Seoul also has one of the most active futures and options markets in Asia. Exchange-traded funds or ETFs make up a third of trading volumes on KRX, and options on single-share leveraged ETFs are among the most heavily traded. South Korea is now the world’s sixth largest market, behind the US, China, Japan, Hong Kong and Taiwan.
Remarkable turnaround
The boom is a remarkable turnaround for the Seoul bourse, which investors had long written off as a laggard compared with its global peers. Although it is home to household names such as Samsung Electronics and Hyundai, the country was for decades infamous for the “Korea discount”, a label used to describe the usually low valuations of firms because of meagre shareholder returns, weak corporate governance under the country’s family-run chaebol (conglomerates), such as Samsung Electronics, Hyundai and LG, which use complex cross-shareholding structures to maintain control while holding relatively small stakes and making low dividend payouts and stock buybacks. That bred a culture of short-term trading and unnecessary volatility.
President Lee Jae Myung, who assumed office last year, has pushed a series of stock market reforms begun under his predecessor three years ago. They include the Corporate Value-up Programme, to encourage listed firms to improve return on equity, increase dividends, buy back shares and disclose plans for improving valuations. Lee wants more Koreans to invest in stocks to wean the country off its traditional attachment to real estate, moving more money into productive assets.
South Korea’s transformation since 1945 is one of the most dramatic economic shifts in modern history. In just two generations it went from war-torn poverty to a high-income industrial powerhouse. Today it is the 12th largest economy in the world.
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By the late 1990s, Hyundai, Samsung and LG had grown into sprawling, highly leveraged conglomerates with enormous political influence, and financial liberalisation in the early 1990s allowed them and local banks to borrow heavily in foreign currencies at short maturities — a dangerous structural vulnerability. In the wake of the 1997 Asian Financial Crisis, Seoul secured a US$58 billion bailout from the International Monetary Fund.
The crisis forced sweeping structural reforms, including financial sector restructuring, improved corporate governance, greater transparency and the break-up of several large chaebol. Hyundai’s and LG’s semiconductor arms were bailed out, merged into a single entity, and later sold to petrochemical giant Sunkyong Group, which renamed it SK Hynix. Now it is Korea’s largest listed firm and the 11th largest in the world.
Since the Asian Financial Crisis, South Korea has remade itself into a soft powerhouse. Its TV dramas are now global exports. In 2012, pop singer Psy (real name Park Jae-sang) burst onto the scene with Gangnam Style, with his signature galloping dance.
The song, viewed over six billion times on YouTube, helped unleash Hallyu, or the Korean Wave of entertainment. Psy and the rise of social media turned the K-pop genre, with its positive and uplifting messages, into a global phenomenon through clever use of technology, including virtual concerts as well as the integration of augmented reality. Not long after Psy’s galloping hit, boy band BTS arrived on the scene with their debut album 2 Cool 4 Skool, captivating audiences worldwide.
The cosmetics industry has become another of the country’s more recognisable cultural and economic exports. The industry has two planks: at the top are skincare brand owners such as Amorepacific, which owns Sulwhasoo, Laneige, Innisfree, Etude House and Hera, and LG Household & Health Care, which owns The History of Whoo, O Hui and Belif. The other is control of the cosmetic supply chain. Firms such as Cosmax and Kolmar Korea supply ingredients to cosmetic brands in Japan, China, Europe and the US.
Another growth engine is the defence industry. South Korea is now the world’s eighth largest supplier of arms and ammunition, accounting for 3.5% of global defence exports. Hanwha Aerospace produces the K9 Thunder self-propelled howitzer, armoured vehicles and missile systems. Korea Aerospace Industries makes the T-50 trainer family and the FA-50 light combat aircraft, and is developing the KF-21 Boramae — a locally designed 4.5-generation fighter jet.
Hyundai Rotem produces the K2 Black Panther main battle tank, considered one of the most capable in the world, and manufactures a range of missile and radar systems. Hyundai Heavy Industries’ and Hanwha Ocean’s shipyards make surface combatants and submarines. Korean defence contractors are big suppliers to Europe, where Nato nations are increasing their defence budgets from 1% to 2% of their GDP to 5% of their GDP.
South Korea is also emerging as a humanoid robotics powerhouse. With its vast auto industry, it has expertise in electric motors, sensors, control units and precision engineering. It makes power steering systems and autonomous vehicles, which in turn are helping it make humanoid key components like actuators. Hyundai Motor Company owns 80% of Boston Dynamics, a top humanoid firm in the US. Goldman Sachs estimates that Korean firms will command a 30% share of global humanoid robot production by 2030.
So, is South Korea’s fascination with stocks just irrational exuberance? If it is, what lessons can one draw from Greenspan’s warning? Should exuberant Korean investors just come to their senses, sell everything and wait for the next market bottom? Here’s the thing: between Greenspan’s speech on Dec 5, 1996, and the dotcom bubble peak in March 2000, the Nasdaq Composite Index surged by over 274%, while the broader S&P 500 more than doubled, or gained nearly 106%.
Let’s say you had a million bucks in the S&P 500 Index ETF at the end of 1996. Your portfolio would have grown from US$1 million to over US$2.4 million if you had included S&P returns and reinvested dividends. If, however, you sold after the Greenspan speech, you were down 47% when the bubble finally burst in March 2000.
South Korean investors may be a tad exuberant but are fairly rational. The benchmark Kospi trades at just under eight times this year’s earnings, a level Goldman Sachs considers inexpensive on both P/E and P/B versus a return on equity basis. The investment bank expects the Kospi to surge to 12,000 over the next 12 months, or a 34% upside.
SK Hynix plans to raise US$29 billion through a secondary share issue as part of its American Depositary Receipts or ADRs listing. SK Hynix’s ADR will enlarge its float and give it a bigger cash hoard to build massive plants at home and a US$4 billion chip packaging plant in the US state of Indiana.
Chips and data centres will remain at the epicentre of Korea’s plans to become a global tech titan over the next decade. On June 29, President Lee joined Samsung and Hynix to unveil a public-private partnership with over US$1.33 trillion in investments. The government will provide tax benefits, infrastructure and fast-track approvals. Chip giants will invest US$520 billion for four new plants in a new chip making hub and spend another US$53 billion on chip packaging facilities. Hynix’s parent SK Group, as well as GS Group and local Internet giant Naver, will build 8.4 gigawatts (GW) of AI data centre capacity by 2029 at a cost of US$350 billion. The investments will add 3.5% to Korea’s nominal GDP per annum through 2026-2035, notes Bum-Ki Son, a Barclays analyst.
Assif Shameen is a technology and business writer based in North America
