South Korea is home to globally competitive companies such as Samsung Electronics and SK hynix, yet extreme swings in share prices are pushing away long-term foreign investors, a senior executive at a major U.S. asset manager said. He warned that the pattern is not only widening the so-called "Korea discount" but could also damage the country's national brand.
World-Beating Gains, but Volatility Neared 100%
Ruchir Sharma, chairman of Rockefeller International, focused on the extreme volatility of South Korea's stock market in a column titled "Why the world's hottest stock market has become a national liability," the Financial Times reported on the 21st.
Sharma said the Korean market has posted one of the world's strongest gains this year on the back of the artificial intelligence boom and improving corporate earnings, but that share prices have swung as sharply as they have risen.
Volatility in the Korean market exceeded 60% this year and at one point approached 100% over the summer, he said. Only four periods since record-keeping began in the 1980s have been more volatile than the past 12 months.
Those earlier episodes occurred in countries hit by financial crises, including Nigeria, Turkey, Brazil and Greece, he said.
Sharma pointed to the high share of retail trading as one reason behind the wide swings. Money has recently concentrated in AI-related stocks, and growing trade in leveraged exchange-traded funds tied to individual stocks has further amplified both rallies and declines, he said.
When the market corrected by about 35% over the summer, the unwinding of leveraged positions deepened the drop, he said. Even after that correction, however, the Korean market remains about three times higher than when the rally began early last year, he added.
Strong Companies, but Long-Term Investors Are Leaving
Without such volatility, Sharma said, South Korea would be a market where investors could expect solid returns from high-quality companies. But sharp price swings, combined with the cyclical nature of core industries such as semiconductors and governance problems at chaebol-led firms, are keeping long-term investors out, he argued.
He singled out a trading culture, driven largely by retail investors, geared toward quick and outsized gains. That approach shows up not only in domestic stocks but also in cryptocurrencies and overseas investments such as U.S. equities, he said.
"A trading culture chasing the big score diverts capital from more productive uses, including many of Korea's own solid companies," Sharma said.
He was also critical of government policy. Reforms aimed at improving corporate governance and protecting minority shareholders were pursued to revitalize the market, he said, but the process encouraged speculation in some respects, prompting authorities to follow up with measures to curb it.
Extreme volatility could also stand in the way of resolving the Korea discount, the market's chronic undervaluation, he said, adding that the government should offer solutions to attract long-term investors rather than compound the problem.
Sharma also stressed that the Korean market's influence extends well beyond the country. "What happens in the world's sixth-largest market reverberates far beyond its borders," he said, noting that about 75% of the earnings of KOSPI-listed companies are generated overseas and that the Korean market has long served as an early indicator of global bull and bear markets.
If the market repeatedly appears to lose control as it has recently, the fallout could spread beyond financial markets, he warned. "The behavior of the Korean market is damaging the Korea brand," Sharma said.
