Korean equities: A diverging, concentrated market

The onset of the Middle East conflict in March triggered a sharp drawdown, due to Korea’s dependence on energy imports from the region and the high foreign participation in its equity market. The sell-off proved short-lived however, as geopolitical fears eased and investors refocused on underlying fundamentals. Korea’s hardware-heavy market composition drove a rapid recovery, and the index has extended its gains into 2026, with 113.6% (TR, USD) year-to-date.

While FTSE has classified Korea as a developed market since 2009 [note2], its industry breakdown differs significantly from peers. Relative to the FTSE All-World Index, FTSE Korea is heavily overweight Telecommunications and broadly on par with Technology (although this is skewed by Samsung Electronics being classified as a Telecom company), while underweight all other industries. In absolute terms, Telecommunications and Technology together account for 72.2% of the index, with Industrials a further 9.9% and Consumer Discretionary 6.4%.

Korean Technology stocks gained 99.7% in the three months to end-of-May, while Telecom rose 39.4%, driven by continued demand for memory chips and advanced hardware. Unlike the US, where equity leadership has become concentrated in hyperscalers and software companies, Korea has emerged as a ‘picks and shovels’ market, providing the physical infrastructure that powers AI systems globally.

Semiconductors have continued to benefit as AI capex accelerated through 2025 and into 2026, with booming hardware demand driving strong earnings revisions and record export growth. Korean firms dominate the High Bandwidth Memory (HBM) market, a critical component used in AI servers, controlling around 80% of global supply. The numbers reflect that dominance, as semiconductors alone accounted for nearly 30% of Korean exports in 2025, and shipments have risen more than 169% year-on-year in May 2026.

Korea’s HBM leadership is difficult to replicate quickly, as new fab investment cycles can take three to five years, creating significant barriers to entry. A supply shortfall in HBM has seen prices surge, with shortages expected to persist for years, leaving SK Hynix and Samsung Electronics as the primary beneficiaries of this supercycle. SK Hynix overtook Samsung as the world’s largest DRAM supplier in Q1 2025, holds around 60% of the global HBM market and counts Nvidia as its largest customer. Samsung, meanwhile, had seen its market capitalisation decline substantially in prior years amid slowing smartphone demand and cyclical memory weakness, before recovering sharply in 2025 as investors rotated back into semiconductor and hardware leaders.

A shroud of uncertainty was recently lifted from the industry after Samsung averted strikes overcompensation tied to the semiconductor boom. The dispute centred on the company’s bonus cap and workers’ demands for a larger share of profits, particularly after SK Hynix agreed more generous terms with its own employees earlier in the year. A government-mediated deal was eventually reached and ratified in late May 2026, easing near-term supply concerns. Under the new structure, Samsung removed the 50% salary cap on special bonuses and agreed to allocate 10.5% of semiconductor operating profit to employee bonuses, comparable to SK Hynix’s 10% cash profit-sharing arrangement.

The heavy manufacturing model of earlier decades has given way to a more strategic industrial base, with defence, shipbuilding and autos as its main pillars (the former two sit within ‘Industrials’, while autos is classified under ‘Consumer Discretionary’).

Defence: Korea’s 2025 defence exports were up 60% year-on-year, as rising geopolitical tensions and increased global defence spending created powerful tailwinds. European rearmament and global munitions demand have generated sustained order flow across artillery systems, armoured vehicles and ammunition supply chains. Korean manufacturers have been better placed than most Western contractors to meet this demand, as the country’s decades-long security environment with North Korea has kept production lines active and ready to scale rapidly. The Lee administration’s target of increasing defence spending to 3.6% of GDP (from 2.3%) reinforces the domestic demand backdrop.

Shipbuilding: Korea maintains a leading global position in high-end shipbuilding, particularly in LNG carriers and specialised vessels linked to energy transportation, and has recently benefited from both regulatory and geopolitical shifts. On the regulatory side, the International Maritime Organisation (IMO) greenhouse gas reduction targets are driving the transition towards alternative-fuel vessels, an area where Korean firms have filed approximately 85% of all global methanol marine-fuel technology patents between 2023 and 2026. On the geopolitical side, US regulatory pressure on Chinese-built vessels has redirected order flow towards Korea.

Autos: Once a primary engine of Korea’s growth, autos remain an important and resilient part of the country’s economic landscape, as Hyundai and Kia navigated the recent global slowdown in electric vehicle demand by pragmatically pivoting towards hybrid vehicles. Korean automakers are increasingly being viewed less as traditional manufacturers and more as advanced technology companies, with deeper integration into the AI ecosystem through autonomous driving and strategic partnerships. However, the sector still faces structural headwinds, including trade tariff uncertainty, intensifying Chinese competition and softer demand across parts of the global EV supply chain.

Despite its extraordinary rally, Korea’s valuation currently sits below its 10Y average on a forward earnings basis, leaving room for further re-rating if earnings momentum is sustained and governance reforms gain traction. The Corporate Value-Up Program, much like Japan’s reforms over the past decade, provides a structural tailwind through rising dividend expectations and improving capital discipline, with Financials (5.9% index weight) among the potential key beneficiaries.

Leaving aside its vulnerability to energy disruptions, as seen in the March drawdown, the FTSE Korea Index provides concentrated exposure to global technology cycles and advanced manufacturing, effectively a HALO (Heavy Assets, Low Obsolescence) trade. Korea’s economy today is far less dependent on the “old” manufacturing model that drove growth in previous decades, and its role as the hardware backbone of the AI supercycle makes it a compelling alternative for investors looking beyond the US.