"Nobody expected it to rise so fast"! South Korea's stock index breaks through "4000 points", up more than 60% this year, the best in the world

The South Korean stock market is expected to achieve its strongest growth in 25 years this year, with the KOSPI index surging 61% from around 2,400 points at the beginning of the year, breaking through the 4,000-point mark and leading global markets.

South Korean President Lee Jae-myung promised at the beginning of next year to push the KOSPI index towards 5,000 points, igniting this round of market rally. This rare political commitment, combined with a surge in global AI chip demand, has driven the stock prices of Samsung Electronics and SK Hynix to soar, significantly boosting the overall market. Recently, JP Morgan and Citigroup have raised their target levels, with the former setting 5,000 points as a baseline expectation and the latter predicting it could reach 5,500 points by the end of 2026.

However, the rapid rise of the South Korean stock market has also raised concerns among investors. Nearly half of the gains have come from Samsung Electronics and SK Hynix, while retail investor leverage trading has reached record highs, and worries about an AI valuation bubble led to a nearly 4% drop in the index last Friday.

Political Commitment Ignites Epic Rally

This month, the Korea Exchange displayed "KOSPI 4000" in bold yellow letters on a giant screen to commemorate this spectacular rally that few believed could be achieved a year ago. The starting point of this rally is Lee Jae-myung's promise of 5,000 points, a rare instance of a political figure setting a specific target for the market.

At that time, the market was still shrouded in the shadow of last December's state of emergency, exacerbating the long-standing "Korea discount" issue, which is the valuation downgrade caused by weak corporate governance. However, Lee Jae-myung's ambitious proposal coincided with a global shift towards AI and chip stocks, prompting a market reversal.

Park Hong Bae, a member of the ruling Democratic Party and the KOSPI 5000 Committee working group, stated:

"No one predicted the market would jump so quickly; the gains even exceeded our expectations."

Part of the South Korean government's push aims to redirect funds from the overheated real estate market into the stock market. As a signal of the government's commitment to revitalizing the stock market, the top official of the financial regulatory agency sold one of his two apartments in the affluent Gangnam area and invested part of the proceeds into exchange-traded funds (ETFs).

Valuations Still Low, Corporate Governance Reform Key

Despite the significant rise causing unease, bulls remain optimistic. Analysts believe that AI-driven demand has initiated a "super cycle" for South Korean chip stocks. Samsung Electronics and SK Hynix still have relatively cheap valuations after their sharp increases this year, with forward price-to-earnings ratios of 10 times and 7 times, respectively, levels far below the regional tech stocks' average valuation of 16 times and significantly lower than Nvidia's 27 times price-to-earnings ratio.

Jonathan Pines, a portfolio manager at Federal Helms, believes:

"Korean stocks are still cheap on a global scale, and if the Korea discount is eliminated, the market could potentially double or even triple." The key to driving the next round of market rally lies in the further advancement of corporate governance reform. With the passage of the amendment to the Commercial Law, investors are currently closely monitoring the progress of the bill to reduce dividend tax rates, as well as a separate vote on the mandatory cancellation of treasury shares. For a long time, corporate groups have utilized treasury shares to maintain control.

However, there are still doubts at the execution level. Notably, South Korea's largest company, Samsung Electronics, has yet to announce specific plans for its "Corporate Value Enhancement Plan" aimed at increasing shareholder returns.

Yiping Liao, portfolio manager at Templeton Global Investments, stated that the next round of gains requires more progress in corporate governance reform:

"We need to see actual concrete reform measures. Words help drive short-term performance, but ultimately you need to see what the government actually does."

Risks of Leverage Trading and Concentration Concerns

It is worth noting that retail leverage trading has increased additional risks. There are signs that South Korean risk-seeking retail investors, after making significant investments in overseas stocks, are now shifting funds back to the domestic market. If the early trend continues, November will be the first month of retail fund inflows since April.

According to data from the Korea Financial Investment Association, the scale of margin trading in November has hovered around 26 trillion won (approximately 17 billion USD), rising about 50% over six months. In addition, there are concerns about concentration, as nearly half of the Kospi index's gains in 2025 have come from Samsung Electronics and SK Hynix.

Kim Dojoon, Chief Investment Officer at Zian Investment Management, stated that for the South Korean market, the 5,000-point target ultimately depends on whether companies do enough to enhance shareholder returns and strengthen the market. He said:

"If it continues to surge like this, it may reach 5,000 points, but then it will likely pull back."