[Editorial] Beyond Kospi rally

South Korea's stock surge signals renewed optimism, but fundamentals remain weak
On Friday, South Korea's stock market crossed a threshold it had not seen in more than three years. The main bourse, Kospi, a barometer of investor sentiment as much as economic health, closed at 3,021.84, reclaiming the 3,000 mark for the first time since December 2021.
For investors long resigned to an index drifting between 2,200 and 2,800, this was no ordinary trading session. Once the psychological barrier gave way mid-morning, market euphoria carried the index higher, ending a symbolic drought that had outlasted two governments and multiple global disruptions.
The rally came less than three weeks after President Lee Jae Myung's electoral victory and inauguration. It would be tempting and politically expedient to interpret the surge as a resounding vote of confidence. But the reality is more complicated and more fragile.
The Kospi's rise has been powered not by earnings but by expectations. Investors are responding to the administration's vow to eliminate the 'Korea discount,' the chronic undervaluation of domestic equities rooted in weak governance, geopolitical tensions and low shareholder returns. President Lee's pledge to push the index to 5,000 may sound ambitious or even fantastical. Still, it has clearly altered the mood. A proposed revision to the Commercial Act, along with the unveiling of a 30.5 trillion won ($22.2 billion) supplementary budget last week, has further buoyed sentiment.
Global conditions have provided additional lift. A weaker dollar and growing liquidity have drawn foreign investors back into the South Korean market after nearly a year of net selling. More than 5 trillion won in foreign inflows were recorded in June alone. Hopes for interest rate cuts and a temporary easing of tariff tensions have added to the tailwinds. These, however, remain volatile forces that could quickly reverse.
More importantly, a fundamental tension persists. Market performance has diverged sharply from the real economy. The Bank of Korea projects gross domestic product growth will slow to just 0.8 percent this year. Corporate earnings, especially among export-heavy firms with exposure to the US, are under pressure. Forecasts for the auto sector have already declined by nearly 3 trillion won since the start of the year. Consumer demand remains weak. The government's decision to pursue a second supplementary budget is less a sign of strength than a measure of urgency.
This disconnect should caution against premature celebration. The Kospi's recovery is encouraging, but it rests on a fragile foundation. The structural issues that have long suppressed valuations — a static industrial base, slow-moving reform and recurring external shocks — remain unresolved. Geopolitical risks with potential implications for South Korean assets loom large, as the US launched strikes on three key nuclear facilities in Iran early Sunday, inserting itself into the escalating conflict between Israel and Iran. The initial impact on markets will emerge Monday, amid concerns that US President Donald Trump's high-stakes gamble may undercut the recent momentum in Korean equities.
To sustain a higher valuation, South Korea will need something more durable than momentum. A more predictable regulatory environment, deeper capital markets and genuine earnings growth are all essential. Industrial renewal is also critical. Over the past two decades, the country's leading exports have barely changed. Unlike in the US, where market leadership shifts alongside technological innovation, South Korea's corporate hierarchy has remained largely fixed.
This is the harder path — and the more essential one. Legal and fiscal adjustments can spark brief rallies, but lasting gains depend on deeper institutional reform and renewed competitiveness.
South Korea must not mistake a breakout for a breakthrough. The Kospi's return to 3,000 is not a verdict, but an invitation to build a more resilient economy, a more credible market and a more compelling growth story. The market has priced in hope; fulfilling it will take more than promises.

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[Editorial] Beyond Kospi rally

South Korea's stock surge signals renewed optimism, but fundamentals remain weak On Friday, South Korea's stock market crossed a threshold it had not seen in more than three years. The main bourse, Kospi, a barometer of investor sentiment as much as economic health, closed at 3,021.84, reclaiming the 3,000 mark for the first time since December 2021. For investors long resigned to an index drifting between 2,200 and 2,800, this was no ordinary trading session. Once the psychological barrier gave way mid-morning, market euphoria carried the index higher, ending a symbolic drought that had outlasted two governments and multiple global disruptions. The rally came less than three weeks after President Lee Jae Myung's electoral victory and inauguration. It would be tempting and politically expedient to interpret the surge as a resounding vote of confidence. But the reality is more complicated and more fragile. The Kospi's rise has been powered not by earnings but by expectations. Investors are responding to the administration's vow to eliminate the 'Korea discount,' the chronic undervaluation of domestic equities rooted in weak governance, geopolitical tensions and low shareholder returns. President Lee's pledge to push the index to 5,000 may sound ambitious or even fantastical. Still, it has clearly altered the mood. A proposed revision to the Commercial Act, along with the unveiling of a 30.5 trillion won ($22.2 billion) supplementary budget last week, has further buoyed sentiment. Global conditions have provided additional lift. A weaker dollar and growing liquidity have drawn foreign investors back into the South Korean market after nearly a year of net selling. More than 5 trillion won in foreign inflows were recorded in June alone. Hopes for interest rate cuts and a temporary easing of tariff tensions have added to the tailwinds. These, however, remain volatile forces that could quickly reverse. More importantly, a fundamental tension persists. Market performance has diverged sharply from the real economy. The Bank of Korea projects gross domestic product growth will slow to just 0.8 percent this year. Corporate earnings, especially among export-heavy firms with exposure to the US, are under pressure. Forecasts for the auto sector have already declined by nearly 3 trillion won since the start of the year. Consumer demand remains weak. The government's decision to pursue a second supplementary budget is less a sign of strength than a measure of urgency. This disconnect should caution against premature celebration. The Kospi's recovery is encouraging, but it rests on a fragile foundation. The structural issues that have long suppressed valuations — a static industrial base, slow-moving reform and recurring external shocks — remain unresolved. Geopolitical risks with potential implications for South Korean assets loom large, as the US launched strikes on three key nuclear facilities in Iran early Sunday, inserting itself into the escalating conflict between Israel and Iran. The initial impact on markets will emerge Monday, amid concerns that US President Donald Trump's high-stakes gamble may undercut the recent momentum in Korean equities. To sustain a higher valuation, South Korea will need something more durable than momentum. A more predictable regulatory environment, deeper capital markets and genuine earnings growth are all essential. Industrial renewal is also critical. Over the past two decades, the country's leading exports have barely changed. Unlike in the US, where market leadership shifts alongside technological innovation, South Korea's corporate hierarchy has remained largely fixed. This is the harder path — and the more essential one. Legal and fiscal adjustments can spark brief rallies, but lasting gains depend on deeper institutional reform and renewed competitiveness. South Korea must not mistake a breakout for a breakthrough. The Kospi's return to 3,000 is not a verdict, but an invitation to build a more resilient economy, a more credible market and a more compelling growth story. The market has priced in hope; fulfilling it will take more than promises.

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