The strong performance of South Korea’s equity market has been accompanied by growing concentration around two semiconductor giants: Samsung Electronics and SK Hynix. This raises questions about the true level of diversification for investors exposed to South Korea, particularly through emerging market indices.
Speaking to Market.ch, Kevin Berton, Fund Manager and Analyst at Piguet Galland, examines the factors behind this concentration and the risks associated with investor positioning.
Samsung Electronics and SK Hynix have long held a prominent position in South Korea’s equity market. Their weight has increased further, however, amid surging global demand for semiconductors and memory chips in particular.
As at 13 May, the two companies together accounted for 51.5% of the KOSPI 200, compared with 38.7% at the beginning of the year.
For Kevin Berton, this situation goes beyond the market movements observed in recent months:
“The concentration of the Korean market appears structural to me. The memory market is an oligopoly, and demand from hyperscalers seems insatiable.”
This trend is being driven in particular by the considerable infrastructure requirements associated with the development of artificial intelligence. The strength of South Korea’s semiconductor exports reflects this momentum: between 1 and 20 September, they reached USD 34.12 billion, a record for this period.
The strength of the sector alone, however, does not fully explain movements in the Korean market. The behaviour of retail investors is another important factor to monitor.
Kevin Berton points in particular to their strong appetite for leveraged ETFs, instruments designed to amplify the daily movements of an index or individual security.
“We were concerned about Korean retail investors’ strong appetite for leveraged ETFs. When positioning becomes excessive, even a limited correction can be amplified by forced selling and the rebalancing mechanisms of leveraged products.”
Two indicators can help assess this risk: the amounts invested in leveraged ETFs and the level of borrowing by retail investors to finance equity purchases.
When both rise simultaneously, a correction can become more pronounced, regardless of the underlying fundamental strength of the companies concerned.
A comparison with Taiwan also helps highlight the specific characteristics of the Korean market. Despite its significant exposure to the technology sector, Taiwan has a different investor structure.
“Korea is more exposed to retail investor flows, whose behaviour tends to amplify market movements, both upwards and downwards.”
Taiwan’s more institutional investor base could therefore help explain the sometimes markedly different market reactions seen across the two Asian markets.
The current concentration also comes against a particular backdrop: MSCI still classifies South Korea as an emerging market, while FTSE Russell has considered it a developed market since 2009.
Governance reforms introduced in recent years could nevertheless gradually help reshape the structure of the market.
“As these reforms begin to take effect, we can hope to see the Korean market rally broaden to other sectors.”
For investors, South Korea therefore serves as a reminder that exposure to a geographically diversified index does not necessarily provide an equivalent level of diversification across companies or sectors. Beyond a market or index label, its underlying composition and the dynamics driving it remain key considerations.
Read Kevin Berton’s full analysis in market.ch (french only)