Korean Stocks: From Correction to a Healthy Recovery

After a historic rally and a sharp correction, South Korea’s equity market may be approaching a turning point. Our Chief Korea Equity Strategist, Joon Seok, explains that the next cycle will need stronger foundations and more sectors joining in.

Read more insights from Morgan Stanley.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Joon Seok, Morgan Stanley’s Chief Korea Equity Strategist.

Today: Why Korea’s equity market may be moving from a sharp reset toward a broader and more sustainable recovery.

It’s Tuesday, August 18th, at 2pm in Seoul.

South Korea’s stock market has delivered the kind of ride that makes even long-term investors check their phones more often than they would like. The KOSPI surged 101 percent in the first half of 2026, then fell more than 38 percent from its peak by July 30th. But the market now appears to be moving toward a more durable recovery.

The first reason is valuation. Take the KOSPI’s forward price-to-earnings ratio, which compares share prices with expected profits over the next year. It fell below five times, its lowest level since 2004. Our capitulation index also dropped to minus 2.53. This index combines market momentum with the breadth of the sell-off, so it helps show whether fear has become widespread. Readings below minus two have often marked troughing territory outside the major crises.

The second reason is that forced selling appears to be easing. Now, we have seen leverage as a double-edged sword as leverage helped fuel the rally, but it also made the decline sharper as investors were forced to cut positions. Assets in leveraged single-stock ETFs have fallen about 70 percent from their June peak, and margin lending has also come down. Now, hedge funds have completed roughly three quarters of a typical risk-reduction cycle. Put simply, the most intense selling may already be behind us.

Still, a healthier recovery needs more than a rebound by the tech sector. Tech remains central because AI infrastructure continues to drive demand for advanced memory. Morgan Stanley Research expects global spending by large tech platforms to reach 805 billion U.S. dollars in [20]26 and 1.2 trillion dollars in [20]27. That creates a lot of opportunity – but it also keeps markets sensitive to any change in capital spending, chip pricing or competition.

The broader Korean economy offers support. Real GDP growth has exceeded 3 percent for two consecutive quarters, up sharply from 1.1 percent in 2025. Full-year growth is now likely to land in the mid-3 percent range; and generally, Korea’s growth is around 2 percent. Importantly, the improvement is spreading beyond exports. Consumption is recovering, tourism has surpassed pre-pandemic levels, and the government is targeting 23 million foreign tourists this year.

There are trade-offs. Inflation reached 3.2 percent in June, and the Bank of Korea raised its policy rate to 2.75 percent. A measured hiking cycle could take rates to 3.5 percent by the first quarter of 2027. Higher rates may help financial-sector earnings, but they also raise financing costs for households and businesses.

The source of market liquidity is changing as well. Domestic retail investors drove much of the first-half rally, but tighter leverage rules mean foreign investors are likely to determine the next leg higher. Corporate-governance reforms and better capital management could also encourage broader international participation.

We continue to see a path toward a KOSPI target of 9,000 by June 2027, with a bull case of 10,500 and a bear case of 5,500. The next phase should be steadier and more balanced. Industrials, financials, healthcare, communications, and consumer staples should also contribute alongside technology.

Korea still has room to run. But the stronger signal may be quality – meaning earnings resilience, disciplined capital management and broader participation. The stock market’s initial rally was fueled by speed and concentrated leadership. The next phase will require wider and more durable support.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.