South Korea’s $2.2 Trillion Stock Rally Owes Too Much To AI

More than eight months ago, South Korea’s new president, Lee Jae Myung, rolled his eyes and pledged to double the Kospi stock index to 5,000 points.

It is hoped that this will be achieved during his five-year term. As a result, it only took five months.

This week the Kospi index exceeded 6,000 points for the first time. The surge in South Korea’s stock market has brought South Korea’s overall market capitalization to about $3.76 trillion, making it the world’s ninth-largest market. The Korean market is now larger than that of larger economies such as France and Germany.

The problem is, the AI ​​boom gets the credit, not the Lee Myung-bak administration. Herein lies the risk: Although Lee Myung-bak has achieved little on the financial reform front so far, South Korean markets are booming. Certainly not enough to justify the 139% gain in the Kospi index over the past 12 months. Or an increase of $2.2 trillion since the beginning of 2025.

To be sure, a lot happened during Lee’s 270 days in office. The six months leading up to Lee’s inauguration were unusually chaotic. The unrest began in early December 2024, when then-President Yoon Seok-yeol declared martial law. Yin was impeached and removed from office (last week Yin was sentenced to life in prison).

Lee Myung-bak’s first priority is to restore calm and trust in South Korea’s institutions. and restore some semblance of order to a National Assembly already mired in resentment and reckoning. This is not an ideal environment for taking legislative measures to improve South Korea’s economic competitiveness.

Sadly, Lee Myung-bak’s predecessors came to power over the past 20 years promising to cut bureaucracy, loosen the labor market, increase productivity, support the entrepreneurial boom, empower women, and wrest economic power from family conglomerates or chaebols that dominate the economy.

The latter challenge is key to ending the “Korean discount,” which has long left the market undervalued relative to its peers. There’s a reason why global index giant Morgan Stanley Capital International (MSCI) has refused to upgrade South Korea to developed market status. This will attract global capital into won-denominated assets.

MSCI asked South Korea to scrap outdated regulations, ease restrictions on corporate ownership, strengthen capital markets, increase currency trading hours, improve transparency and even tolerate short sellers. To their credit, lawmakers acted to resume short selling in March 2025, ending a 17-month ban. Seoul has also extended foreign exchange trading hours to 17 hours.

In June 2025, when it again rejected South Korea’s request for an upgrade, MSCI said: “Despite these reforms, investors believe it remains critical to assess whether the measures implemented are sufficient, as developed markets typically feature fully convertible currencies and active, unrestricted offshore and onshore FX markets.”

Now here’s the good news: South Korea’s parliament just approved a long-debated measure requiring companies to eliminate so-called treasury shares. The shares do not receive dividends or voting rights and are used by chaebol to avoid hostile takeovers. Eliminating them has long been key to ending discounting in South Korea.

Lawmakers also claim more reforms are on the way. The discount problem, however, is much bigger. It is also important that lawmakers take strong, transparent antitrust action to reduce the dominance of a handful of family-controlled conglomerates. They have long occupied economic oxygen that should be shared with startups that could disrupt Korean companies.

In the meantime, it’s good to see Seoul moving forward with initiatives to improve the country’s capital markets. But Team Lee still has a lot of work to do. Additionally, South Korea faces numerous macroeconomic headwinds in addition to U.S. President Donald Trump’s tariffs. Case in point: keeping track of household debt. In the fourth quarter, total household debt approached the $1.4 trillion mark.

All of this bodes well for South Korea’s prospects of relying on domestic demand to lift economic growth to 2% this year. Or for investors who think the job done by the Lee Myung-bak administration is worth the stock market more than doubling almost overnight. It would be nice if AI wasn’t a bubble. If so, as many fear, the negative impact on South Korea could be significant.