HONG KONG, March 5 (Reuters Breakingviews) - When South Korea’s President Lee Jae Myung took office in June, many were sceptical of his campaign pledge to double the country’s ​benchmark KOSPI index (.KS11), opens new tab to 5,000 within his five-year term. Just eight months later, though, the KOSPI topped ‌6,000, becoming the best-performing major index globally. But this week’s rollercoaster ride has exposed just how volatile the country’s stocks are. Between war angst and artificial intelligence hype, Lee now faces a new headache: steadying markets.

Thanks to booming demand for AI-related hardware and infrastructure, global investors flocked to ​South Korean heavyweights such as memory chip giants Samsung Electronics (005930.KS), opens new tab and SK Hynix (000660.KS), opens new tab. As of January, foreign holdings ​of local stocks topped, opens new tab$1.1 trillion, more than double the level from a year earlier and 32% of ⁠the total. Shares in AI darlingSK Hynix have risen roughly fivefold over the past 12 months, vastly outperforming its key customer ​Nvidia (NVDA.O), opens new tab and rivals.

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War in the Middle East has not only sapped that momentum but also injected volatility virtually unseen in a ​major stock market. In just the three trading days following the U.S. and Israeli air strikes in Iran that killed many of the country’s top leaders, including Supreme Leader Ayatollah Ali Khamenei, the benchmark KOSPI closed down 7%, then another 12% – a record daily selloff – before rallying as ​much as 12% on Thursday morning. The export-driven economy’s sensitivity to rising oil prices, concerns over global stagflation, plus broad-based ​profit-taking are all factors, according to Jason Liu, head of APAC equity and derivatives strategy at BNP Paribas.

Having staked much of his political ‌capital on ⁠a strong stock market, Lee’s priority now is to ease volatility. Officials have been quick to reassure investors that it will deploy its 100 trillion won ($68 billion) market stabilisation fund. The government is also preparing to introduce initiatives to encourage the country’s army of retail investors to repatriate their foreign stock holdings.

Yet it’s unlikely Seoul can do much to tame hot money flows. ​Just before the attacks on ​Iran, foreign investors sold a ⁠net $4.8 billion of shares on Friday – the largest one-day outflow on record – suggesting many funds had already started to unwind their bets; and in the midst of Wednesday’s historic market crash, ​foreign investors were actually net buyers, per BNP’s Liu. War or not, Seoul has its work ​cut out steadying ⁠markets.

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Context News

• South Korea’s benchmark KOSPI index rallied as much as 12% on the morning of March 5, following a record selloff of 12% the previous day.
• President Lee Jae Myung affirmed the government’s readiness to deploy market stabilising measures if needed. “We must ⁠proactively respond ​to increased financial market volatility. We should accelerate policy efforts and swiftly ​implement and manage the 100 trillion won market stabilisation programme,” Lee said at a policy meeting. He was referring to the government’s emergency fund that can ​be deployed in times of major market declines.

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Editing by Antony Currie; Production by Ujjaini Dutta

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Robyn Mak

Thomson Reuters

Robyn Mak joined Reuters Breakingviews in 2013. Previously, she was a Research Associate for the Global Policy Programs at the Asia Society in New York. She has also worked at the Carnegie Endowment for International Peace in Washington DC and interned at several consulting firms, including the Albright Stonebridge Group. She holds a masters degree in international economics and international relations from the Johns Hopkins School of Advanced International Studies and is a magna cum laude graduate of New York University.

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