What’s driving South Korea’s epic stock market rally? - Asia Specific podcast, BBC World Service

South Korea stock market is having an incredible year, isn't it, Jake? It's now enjoying the world's biggest rally. Yeah. And that is incredible. It has doubled in the last six months. And I don't remember ever seeing anything like this. But this rally is fueled mainly by two companies that make AI related chips, isn't it? So we're asking is this rally sustainable. or could investors get burnt?

As always, I'm Mariko in Singapore. and this is Asia Specific from the BBC World Service. Twice a week we bring you Asia Pacific stories. unpacked by those who know them best. Our man in Seoul, Jake Kwon, is back. Welcome back. Jake. Hey, thanks for having me. I also have Herald van der Linde, the Head of Equity Strategy. for Asia Pacific at HSBC, which basically means, you know, everything about Asian stock markets. Is that right, Herald? Well, not everybody. Not everything. But I've looked at it since 1995 or something like that, so.

Pretty much everything. But thanks for having me on your show. Thank you for coming on the pod. Can I tell you guys something, in my previous role as a business journalist, I used to wear red when the market was tanking. and I would wear green when there was a rally. And today I'm in bright green and bright green earrings. because, Jake, the South Korean market. I mean, what's happening? It's having an incredible year. Tell us what's happening there. Wow. I think you're putting it actually mildly.

because it doubled in the last six months. And that is not including the 75% jump the year before that. So it is extraordinary. Who's piling in though? Are they like young investors? Do we know? Well it's everyone across the board. You know, I was just looking at who is borrowing so much money to get into it, now they're really leveraging it. And it's not just the people in their 20s, but like people in their 70s are also, you know, their borrowing had doubled this year.

So it's everyone, really. It seems like a bit of a fear of missing out happening. And Herald, in the expert view, what exactly is happening? What's behind this massive rally? Well, first of all, I have never seen something like this before. As I mentioned, I've been looking at Asian stock markets actually. since 1990, but say 1995 as professional. And the sort of movements in such a major market is unheard of. Korea is now, if I'm not mistaken, the sixth largest market in the world.

And the way it goes, by the end of this week, it could well be the fifth largest market. So this is unprecedented. What's going on here is a couple of things really. But the big story is of course, Korea is really good in making the sort of chips that the hyperscalers. or the data centers that you need for AI operations. They're really good at making it. So people have piled up. and said, we need to buy that from companies such as Samsung and Hynix. And because everybody needs it, these companies for the next three.

or four years have like fixed orders, like people are putting orders in for 2028 and 2029. I mean, I was reading though, that this rally, those two companies that you talked about, Samsung and Hynix, is it right, Herald, that they account for. about 40% of the index's value? I mean, isn't that quite unusual? Isn't that to almost like, heavily reliant on those two companies? Yeah. I wouldn't say it's completely unusual, but in particular in Korea it is.

There are markets that are very diversified. The US market is diversified. Japan is diversified. India is actually diversified market. There are in emerging markets you have sometimes. markets that are not diversified. It's dominated by a few companies. And actually Taiwan is also dominated by one company, TSMC, that makes up the lion's share. So there is sometimes this sort of dominance of a particular sector. or a bunch of companies. So it is not completely unheard of.

But in the context of Korea, it is. This is now really big, and this is becoming a problem for professional investors. because, yeah, how do you diversify? But yes, this sort of concentration is. quite big at the moment in Korea. You mentioned Taiwan because I was also looking at the Taiwan's stock market. TAIEX, that's also doing quite well. So is this just all about the AI boom driving these stock markets rally? Yes and no. So firstly, yes, what we've seen is when the AI boom started in the US.

So the AI company said we need to do all kinds of programmes. We need to run them on data centres, to build our data centres. Hundreds of billions of dollars poured into that to build these data centres. Then they needed these chips and two years ago, people talked about these specialised chips from Nvidia. Now they were made by TSMC. So first we saw the Taiwan market TSMC rallying. That was the first way to play it. Eventually, TSMC became so big that professional managers said, I can't just put my whole portfolio in this.

So they started to buy in Taiwan, other companies that are related or benefited from TSMC. And when they couldn't do that anymore, they said, let's go somewhere else. And that was Korea. And it was about a year ago. And then you go for the DRAM place, the memory place. But these DRAM plays were not just making kind of common memory chips. anymore, but they also started to make these chips high bandwidth. It's called particular chips that are really applicable for the AI industry. So their business took off and these fund managers rotated into Korea.

And that's really when the Korean market, just like Jake said, started to rally from 3000 a year ago to over 8000 as we speak. You know, it's incredible because I still have a text from my father. when, you know, the KOSPI went 3500. and he was telling me like, okay, now we need to sell off everything. This is unusual. Like, this is overheated market. We need to get out. Get out. And I was like, yeah, yeah. I mean, that sounds pretty convincing because a lot. of Korean people had no expectation that this could be 8000-point market.

I remember when Lee Jae Myung was coming in, and his campaign pledge was that he's going to make KOSPI 5000. And everyone thought that was a dreamy number. So this 8000 is just incredible. And that wasn't long ago though, was it? It was only, what? About a year ago. Yeah. Yeah, it was about a year ago. Yeah. No you're right. There's two points I'd like to pick on here actually. So I think it was your father, you said 3000,

I haven't seen this before, you need to sell now. That is set in memory for Korean investors. So Korean investors over the last decades. have very often invested actually in the US. That was their big flow. So the Koreans said, well listen, we want to get this market higher. and we're going to initiate a couple of sort of ideas, initiatives to bring this market higher. They looked at Japan, where there was some corporate reform taking place. that was value up in Korea. So that's started to kindle the fire, if you want to put it like that. And some of the Koreans started to bring a bit of money back from the US,

all kinds of tax advantages were given out as well. If you bring your money back, you don't have to pay taxes on it. Come and invest it into Korea. So that kindled that fire a little bit further. And that was yeah, that created sort of a second leg to the rally. But it's also important because you just asked me, is it just AI here? It is not just AI to be extremely frank, because there's other stories going on as well. You have this value up. So companies are paying more dividends. They're doing more share buybacks. So that's positive for investors. So the attitude of Korean firms.

towards their shareholders has improved like we've seen in Japan as well. But in addition to that, Koreans are also good. in making all sorts of other stuff that the world needs. Defense budgets around the world are going up. So military equipment and these sort of things, radar, that's where the Koreans are also good in. We are looking. for alternative sources of energy in this sort of high oil price world. and nuclear, solar, hydro. But engineering products are required here.

For example, nuclear reactors and these sort of things. Turns out the Koreans make that. So, that is helping. And then you have this sort of Korean sort of soft power wave, Hallyu, as they call it, with boy bands that are incredibly popular. and people like Korean drama, they like Korean food. So you even have noodle companies in Korea that are actually doing pretty good and exporting their products. So Korea is not just an AI story that dominates the market. in terms of size, but there's all these side stories in Korea as well.

Yeah, we did two, three episodes of this podcast, a Korean soft power with Jake. I have a very important question, Jake, did you actually hold on to it. when your father told you to sell or you're not allowed to say? No comment. But it's interesting because I think. a couple of months ago we did an episode on crypto. and our contributor then said that South Korean investors are actually. quite big on crypto and meme stocks because they think. that the KOSPI and the, you know, the main stock market is too dull.

You know, it doesn't move that much. So with this rally, has that changed? And you know, what is everyone telling you. like all your friends family members, are they all in on it? I think that this year the biggest success in Korean thing is not. K-drama K-pop. No, it's K-market. And, you know, and I think also another thing is. a lot of Korean people have invested into things like electric battery and. these other things that were pretty hot, you know, a year or two years ago.

They're not really seeing big profit here. You know, all these success has been concentrated. in just AI or AI related materials. So while the whole KOSPI index is 8000 plus, actually the very few people had made huge amount of money in this big rally. You know, a lot of people are, I believe, still in the minus. The funny thing is that the foreigners are selling. And why is that? That's not because foreigners don't like this story.

Although I would say there's maybe a growing group of people who get. a little bit worried about the sort of the numbers, the sheer stellar performance we have seen in some of these stocks. But a lot of them cannot buy more. Because if you, as I mentioned earlier, if you got an Asian portfolio and you have TSMC and Samsung in there, and that is like for some of these portfolios now. over 30% of their total holdings, then if you then go to your clients, let's say in a German pension fund, they say, well, you tell us you're making a diversified bet in Asia.

You're building a diversified portfolio for us. But a third of your portfolio is just in three stocks. So a lot of foreign funds coming to a limit whereby they cannot buy more. And as the market rallies further, they have. to actually sell to bring these exposure in their portfolios down. So we see foreign institutional funds, we actually see them selling, domestic institutional funds are selling as well. That's the pension funds, that's the biggest there, as I mentioned earlier, because they're up to a limit as well.

So the ones that are really buying is now the retail investor in Korea, and they're bringing some of that money back from the US. And they're borrowing in order to get into the market as well. Jake, you were earlier talking about how president Lee was made. it kind of an election promise to boost this stock market rally. Can you tell us what did South Koreans use to invest in, and. why was the president keen to get more people to invest in the stock market? Well, two words real estate, right? This is probably the same for a lot of East Asians.

You know, a lot of East Asians see real estate housing. as the primary investment vehicle. Now for the current ruling party, what they saw as the failure of their previous administrations is. that whenever the Seoul's apartment prices skyrocketed, the government at the time were blamed for this. You know, a lot of people had FOMO, obviously, a lot of voters were very upset at not being able to get into the market. that they do not get to afford these housing. So that became a huge issue.

And for Lee Jae Myung, for the new government, they went in. and they are trying to do a strategy called Money Move. The idea being that they're going to encourage this stock market, they're going to make, you know, hold. a big party in the in the South Korean stock market. So a lot of the Korean public will be encouraged to move their money. from the real estate market into the stock market. and thus kind of keep the real estate prices low or stable.

Now, the question here is, okay, are people going to believe in the longevity of the Korean stock market? And will they keep the money there and let it kind of grow there? Or as soon as they see some big profit there, are they going to take that all of that out so they can buy a house in Gangnam? I think so far in this month we are starting to see some jump. in the real estate prices in Seoul, and a lot of analysts are saying perhaps the money is moving back to real estate. Yeah, because the whole investing mentality of, I think.

it's fair to say Northeast Asians, because I'm originally from Japan. and a number of people who actually invest in stock market in Japan. is even lower than South Korea. And Herald, correct me if I'm wrong, but I was reading Korea, about a quarter of the population invest in a stock market, whereas Taiwan is huge. It's nearly half of the population, whereas China and Japan only about 15%. So why is this? Why is there a kind of reluctance or hesitance. to invest in the stock market in Northeast Asia?

Korea is somewhere in between Taiwan, where half of the people are. in the stock market and say, China and Japan, you have on the other side. Remember that the Japanese stock market from 1989. or the 1st of January 1990 when it peaked, it took about 20 years. for it to settle. So by 2009, 2010, it bottomed and then it was gradually moving higher. And only in the last couple of years it moved up higher. So if you invested in the last 25,

30 years in that market for a long time, you were losing money. So people got nervous and very cautious on investing in. One of them. Well, there you go. Here, there's prove here in the room even with us. And that maybe to a certain extent also a bit in China. over the last ten years, maybe not over the same time period, but also in China. And and to be honest, in Korea as well. Korea for a long time, as Jake, you said, people said, why would you invest in the stock market? You're not going to make any money there. It's only literally. over the last 12 months that suddenly this market poof and,

and nearly tripled from where it was a year ago. Jake, you were earlier talking about how it seems. like everyone is borrowing money in order to invest in the stock market. And I, if I remember correctly, the debt level of the South Korean households are quite high as it was. Right? So is this quite dangerous, because, you know, especially if this index is reliant. on two companies, isn't it actually. quite risky that everyone is actually borrowing money to do this?

Well, I think South Korean investors have. a high appetite for very risky investing. You know, there could be many cultural reasons for this, but a lot of that debt is going to be in the housing mortgage. Korean people kind of take it as a kind of default. that they're, you know, they're going to borrow a lot of money to buy housing. And I think there is some of that translating into the idea. of leveraging money to buy stocks as well. They don't really think of it as risky or problematic.

Another thing I think here is that there is zero tax. on making money in the stock market in Korea. So if I buy Samsung Electronics stock and then I double it tomorrow. and I sell it all off, there's zero tax on it. Now. There's tax on the dividend. But but there's no tax. And this is different from real estate. So if you are going to make big money, stock market is where it's considered to do. Now, of course, I think what your question was getting at is, isn't this all very dangerous? What if there is a bubble.

and what if it pops? Yes, it is very, very dangerous. And if people are all leveraging it, obviously the problem is the margin call. And then, you know, the banks for selling all your your holdings. And yes, we've seen this movie several times before in Korean history. And I remember, you know, it happening a few times in my life, too. But this has been a pattern. I don't think a lot of people going in right now. are really thinking about that. Yeah, people. are pouring in, allows them to maybe also to get leverage.

I looked up that number as well. I think they borrowed about $25 billion. At the moment, total lending is $25 billion to put that. into the stock market. So this is great. for these people as long as the market goes higher. But if something would happen and it goes lower. Then leverage plays two ways, right? It's nice on the way up, but a little bit less so on the way down. Indeed. I mean, as you said, as long as it keeps going up, it's great. But I mean, given as we've been talking about it,

there's this heavy reliance on those two companies. I mean, isn't it quite possible. that those investors, especially retail investors, could get burned? I mean, as as Jake said, Herald, we've seen this before. Dotcom bubble and all sorts of things. But how likely, how sustainable is this rally? In the late 90s, we had a new technology as well. That was the internet. Completely new companies could go online, sell their products, and there was a whole boom and new companies emerged like Amazon in the US.

So that caused a rally in the stock market as well. But then in 2000, in March of 2000, the market suddenly rolled over. And then it went down for four or five years. And then there was nothing that happened in March 2000 that we can say, well, this is of course, there was the announcement of this guy. of the central bank doing this or some company doing this. Then we could say that was the cause for the market to turn around. No. Sometimes markets just go up and up and up.

And then eventually some people say, I'm going to get out and other people get out. And before you know it, people say, oh my god, somebody else is selling. And then the momentum moves in the other direction. There's all sort of dynamic. And my feeling is maybe we are in somewhere like 1999, the underlying order flow and the profit growth. of these Korean giant memory makers is just good. So that allows them to to rally further. On average, the market is growing 250% each year. Something like that, is enormous growth numbers. And these numbers are changing by the day.

But it could be that something else happens in the world. that we are finding very difficult to predict. Think about what happened in 1999. They raised interest rates and that that sucked up money from the market. and eventually might have been the cause for that sort of shift. in sentiment towards that new technology, the internet bubble at the time. That might happen now as well. Maybe something else happens, oil prices, these sort of things. Or maybe it's a combination of all these things that gradually shifts the momentum, and then it can be that the market has its own momentum.

and goes down as well. So we need to be very open for that, in particular, in light of the sort of leverage that we have in the system. I, for one, have completely missed this rally and a bit disappointed. to be hearing all this exciting things happening in South Korea, but it's so great to get your both your insights. Herald and Jake, thank you so much for joining me. You've been watching Asia Specific from the BBC World Service. with me, Mariko Oi in Singapore. If you have any questions or thoughts on what we covered in this episode.

or any other stories from the region, please leave us a comment below. You can also get in touch with us on email asiaspecific@bbc.co.uk. and click like and subscribe so you never miss an episode. See you next time.