Iran Conflict Escalation Weighs on Korean Market Sentiment

South Korean Equities Crash Amid Iran War Tensions

The South Korean stock market, once the world's best-performing market, has taken a drastic turn for the worse as the Iran war exposes the vulnerability of a rally narrowly built on a handful of growth stocks. The benchmark Kospi Index has fallen 15% this month, putting it on track to be among the world's worst performers. Foreign investors are also headed for a record outflow, with a staggering $493 billion wiped out from the country's market cap through Friday.

The market's extreme volatility has been a major challenge for investors, with steep drops followed by outsized rebounds triggering an unusual wave of trading halts. The Kospi circuit breaker, which temporarily suspends trading after an 8% drop, has been activated twice this month alone, accounting for a quarter of all such events since 2000. Additionally, a 10th sidecar, activated when Kospi futures move 5% or more, has been triggered this year, compared with three for the whole of 2022.

Korea's status as an energy importer also raises the risk of higher inflation and monetary policy tightening. The country depends on the Middle East for over 70% of its crude oil imports, leaving it highly exposed to an oil shock. Authorities are already mulling widening restrictions on driving, highlighting mounting concerns over rising energy costs. There has yet to be "any real pricing in of war," said Marvin Chen, strategist at Bloomberg Intelligence. "There may be further loss in earnings momentum the longer oil prices stay elevated."

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Concerns over aggressive AI spending are also rising as Google's newly-publicized TurboQuant technique, which makes operating AI more efficient, raises questions about the sustainability of chip demand. That's weighing on SK Hynix Inc. and Samsung Electronics Co., which together account for nearly 40% of the Kospi. Recent foreign outflows have been driven largely by a selloff in the chipmaker duo, according to a Goldman Sachs note. The note added that foreign ownership in the two stocks have fallen to the lowest level since 2022.

Despite the recent downturn, some investors remain optimistic about the long-term trajectory of Korean stocks, citing strength in core memory such as high bandwidth memory, a surge in chip exports and ongoing corporate governance reforms. However, many prefer to stay on the sidelines until there's greater clarity on the impact of supply chain disruptions from the Middle East conflict.

Foreign Investor Outflows

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Kospi Circuit Breaker

Kospi Sidecar