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

Eight-plus months ago, new South Korean President Lee Jae Myung had eyes rolling with a pledge to double the Kospi stock index to 5,000.

The hope was to reach that goal during his five-year term. Turns out, it took just five months.

This week, the Kospi index topped 6,000 for the first time. The surge in Korean shares brought overall Korea’s market capitalization to about $3.76 trillion, making it the No. 9 market globally. The Korean market is now larger than those of bigger economies like France and Germany.

The trouble is, the artificial intelligence boom gets the credit — not Lee’s administration. Herein lies the risk: the Korean market is going gangbusters despite Lee having achieved little to date in terms of financial reform. Certainly not enough to justify the Kospi being up 139% over the last 12 months. Or a $2.2 trillion rally since the start of 2025.

Granted, Lee’s had an event-rich 270 days in office. The six-month period before Lee assumed the presidency was uniquely chaotic. The turmoil began in early December 2024, when then-President Yoon Suk Yeol declared martial law. Yoon was impeached and removed from office (last week Yoon was sentenced to life).

Lee’s first job was to restore calm and trust to the Korean system. And to return some semblance of order to a National Assembly that had descended into rancor and score-settling. Hardly an ideal environment to take legislative steps to raise Korea’s economic game.

Sadly, Lee’s predecessors over the last 20 years all took office pledging to cut bureaucracy, loosen labor markets, increase productivity, support a startup boom, empower women and wrestle economic power away from the family-owned conglomerates, or chaebols, that tower over the economy.

This latter challenge is the key to ending the “Korea discount” that has long left the market undervalued relative to peers. There’s a reason global index giant MSCI refuses to upgrade Korea to developed-market status. That would lure tidal waves of global capital into won-denominated assets.

MSCI has requested that Korea scrap outdated regulations, loosen limits on corporate ownership, strengthen capital markets, increase currency-trading hours, boost transparency, and even tolerate short sellers. To Seoul’s credit, lawmakers acted in March 2025 to resume short-selling, ending a 17-month ban. Seoul also increased foreign exchange trading hours to 17 hours.

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

Now for the good news: Korea’s parliament just approved a long-debated measure demanding that companies cancel so-called treasury shares. These shares, which don’t receive dividends or voting rights, are used by chaebols to avoid hostile takeovers. Eliminating them has long been key to ending the Korea discount.

Lawmakers also claim that more reforms are on the way. Yet the discount problem is much bigger. It’s also vital that lawmakers take strong, transparent antitrust actions to reduce the dominance of a handful of family-controlled conglomerates. They’ve long hogged the economic oxygen that should be shared with startups that could disrupt Korea Inc.

In the interim, it’s great to see Seoul pushing ahead with moves to improve the nation’s capital markets. But Team Lee has lots of catching up to do. Also, Korea faces numerous macroeconomic headwinds beyond U.S. President Donald Trump’s tariffs. Case in point: record household debt. In the fourth quarter, total household debt neared the $1.4 trillion mark.

All this augurs poorly for Korea to rely on domestic demand to lift growth to 2% this year. Or for investors who think Lee’s government has done work to deserve a more than doubling of the stock market virtually overnight. If AI isn’t a bubble, then fine. If it is, as many fear, Korea’s downside could be significant.