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Under the Banyan Tree – Behind one of the biggest rallies we've ever seen
739 Plays10 days ago
Herald welcomes fellow equity strategist Prerna Garg to the studio to dissect the massive rally and white-knuckle volatility that Korean stocks have seen in recent times.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/20/rH7BNLm
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Transcript
Korean Retail Investors' Market Influence
00:00:00
Speaker
That's why they're famously known as Korean ants, because they're small in size, but together they can really move the market.
Podcast Introduction & Host Introduction
00:00:16
Speaker
Hello from Hong Kong and welcome. You're listening to Under the Banyan Tree, where we put Asian markets and economics in context. I'm your host, Harold van der Linde, head of Asia Equity Strategy here at HSBC.
Korean Stock Market Surge Overview
00:00:28
Speaker
And on on podcast today, we're looking at a stock market that's been very hard to ignore in 2026. The Korean market is up more than 150%. That's one and a half times, 150% in the past year, despite a substantial sell-off in February and March. So the question is, what's really behind this?
Guest Introduction: Prun Agarg
00:00:48
Speaker
And I'm joined here with Prun Agarg, my fellow equity strategist, to dig deeper into that. So let's get conversation started. From HSBC's Global Investment Research, this is Under the Banyan Tree.
COSPI Index Performance
00:01:03
Speaker
So as I said in the intro, the Korea's COSPI index, that's the index that follows the broader market of Korean stocks, is up more than 150% in the past 12 months and up 50% so far this year. that's That's pretty good. I mean, I can't remember stock markets moving that far so quickly.
Memory Chip Market Impact
00:01:21
Speaker
That comes as memory prices. Chips have risen more than 12 times over the past year, which is expected to see earnings on the Korean index to triple in 2026. And yet, in February alone, foreign investors sold 21 billion US dollars in Samsung Electronics and SK Heining stock alone.
Foreign Investor Activity in Korean Market
00:01:41
Speaker
That's around three times the amount of shares bought across Korea in the second half of last year. So we've seen big inflows, then big outflows. There's been a lot of things going on there. And outflows actually in March were even higher. So let's bring in a guest for
Global Attraction to Korean Equities
00:01:55
Speaker
this week. Prerna, welcome back to the studio. Thanks, Harold. It's great to be back. So Prerna, why has this market performed so well? Let's just get into that.
00:02:04
Speaker
Herald, Korean equities have quietly turned the corners from being one of the most under-owned market to being the hottest market, I would say, globally in last one year. And I would say that's majorly on the back of ongoing memory upcycle.
00:02:19
Speaker
Every electronic equipment, say, like, you know, from phones, as you said, to even EVs, they need
AI Boom & Memory Demand
00:02:25
Speaker
these chips. yeah So as we know, in last couple of years, there's massive capex going into AI, artificial intelligence. And when companies are building data centers, they need a lot of products. This includes servers. These need those high-end chips you talk about, but they also need memory. Think of it as like, you know, they're building models, AI models, and these models get trained on a lot of data. Mm-hmm. And the models need to remember what happened in US back in 1987. Of course, so otherwise you can't train them, right? yeah otherwise Otherwise you cannot train it So because of the ongoing investments into AI, there is a massive surge in demand for memory.
00:03:02
Speaker
That is one part of the equation. But there's not enough supply. So there is more demand, there's not enough supply, because of which the prices of these memory chips have increased 17 times in the last 12 months. So just just build another factory and then there you go. Yeah, it takes time. So we have seen massive capex going on already in the last couple of quarters, but it takes time. But at the moment, because the demand is more than supply, the prices
Dominance of Samsung & SK Hynix
00:03:27
Speaker
are rising. And in Korea, there are two big memory makers, Samsung Electronics and SK Hynix, that kind of have a monopoly in the whole memory business. In this case, duopoly. And so as memory prices are increasing, the demand is rising. These companies are making massive profits on back of And their profit growth, yeah, they must have skyrocketed, right? ah
00:03:48
Speaker
For the whole Korean market, the profits are expected to triple in 2026 alone. Amazing, right? So these prices have gone up a lot. And also, these are businesses whereby it's really expensive to build these plants. So if your prices go up you sell much more, actually, your profits go up even faster.
Rise in Korean Household Investments
00:04:06
Speaker
So...
00:04:07
Speaker
Who's been buying it? must ah Is it being foreigners? Who's been buying this market? that is another interesting story going on in Korea. Of course, fundamentally, the earnings are coming in, but there is a massive demand for equities from the local households. Locals. Locals. So Korean households have always been known ah known as big buyers of equities. Like, you know, I think ah in one of the podcasts, we spoke about how they were buying aggressively in U.S. equities, but they also buy a lot of local equities. Yeah. And that's why they're famously known as Korean ants. And the animals, right? The animals, the small animals, because they're small in size, but together they can really move the market. But what happened, like, you know, last year um ah when the new government took office, they have come out with a series of policies that mostly looked at supporting the equity market. For example, like last year, they dramatically reduced the taxes people have to pay on dividends.
Tax Policy Changes & Market Impact
00:05:05
Speaker
So this creates additional demand. ah This gives additional reason why one should buy equities because the dividends that you earn from them are not as ah heavily taxed as a lot of other incomes are taxed. And I believe also they've really made it persuasive to companies to pay more dividends, do more what we call share buybacks. So that means that fewer shares are outstanding. So for everybody's got a bigger share in the company. And as companies are paying more dividends, it's good for the end shareholder. Yeah. Also, a very interestingly, in December, they launched a new policy as per which if a Korean household sells their equity holdings in the US, repatriates the money back to Korea and keeps the money invested in Korean equity market for at least one year, they would not have to pay any taxes on that. Or capital gains tax. So this just tells that they want the money to come into equity market and they want the money to stay in the equity market. So you would then think because all these things that we spoke about, with the exception of the last one, it doesn't matter. That's good for foreigners. If they pay more dividends, goes to foreigners, and goes to locals. But the last thing is in particular for locals to repatriate their money into Korea. And has that happened? It's happening, like, you know, we've seen initial signs of money coming in, they have to bring the money back into a particular type of capital account. And I think within the launch of the scheme, some 90,000 new accounts were opened in Korea. And like, you know, of course, this makes it ah interesting for ah the households to bring money back. But this also boosts their confidence. It shows that the current government is more equity market friendly, and they'll like, you know, make it make sure that the markets remain stable for a long time yeah
00:06:44
Speaker
But Harald, that's the domestic story. But if we look at the foreign investors, they have quite aggressively sold their holdings in Korea, and that has made market very, very volatile.
Market Volatility Drivers
00:06:55
Speaker
Yeah, Korea in February, but in particular in March, was probably also the most volatile market, not only in the world, um but also I have hardly in my 30-year career seen a market being this volatile. So there were days that this market went up 12%, went 12%. Sometimes it was down 9% by lunch, and then it was only down 3% by the end of the day. so it's all over the place, right?
00:07:20
Speaker
And I think what we see, as you say, locals were repatriating money back into Korea. Foreigners were actually selling in that process. So we're talking about, say, from the mid-February onwards, they started to reduce their exposure. They had a lot of exposure already because the AI story was really the only big investable story in the region. Right.
00:07:41
Speaker
And then, of course, we had the uncertainty related to what happened in the Middle East. ah Korea is an importer of oil. People were worried about this and that accelerated all of this. So you have foreigners selling even more. Locals were still bringing some money back and that created an enormous amount of volatility. I remember at one point SK Hynix was the biggest overweight in a lot of portfolios we look at. Yeah. So it was, I think, for most emerging market portfolios, SK Hynix and also its holding company, technically, SK Square, they were basically the biggest holdings that they had. And if you look at that right now, that's not the case anymore. It's gone down a lot. Exactly. It doesn't show in the top 10 anymore. So the Middle East caused
Diverse Growth Sectors in Korea
00:08:22
Speaker
that ah volatility.
00:08:24
Speaker
What is important here that the magnitude of the flows were really big. So last year, they bought in total something like maybe $10 billion foreigners. In February alone, they sold $12 billion. And then in March, they sold another $23 billion. sos So the numbers that we've seen coming through this market is just… Quite outsize. It's quite outsize, absolutely. But is this only a tech story or is there more going on? It's… goes beyond tech.
00:08:51
Speaker
These companies are really big, so memory gets a lot of traction. yeah But I think the story in Korea is much bigger and broader and goes beyond memory. For example, example defense. yeah We know globally economies have stepped up their defense spending. yeah And then think about nuclear. So we know, like, you know, we were just talking about ai and AI data centers are known to be power hungry.
00:09:13
Speaker
Right. But also more recently,
Cultural Exports & Economic Growth
00:09:16
Speaker
with the outbreak of conflict in the Middle East, companies, the economies, countries, economies, they want to be more self-sufficient in energy. yeah And over the course of few quarters, we've seen countries coming out and saying that they want to build more nuclear plants. And the korean companies they are the constructors of that. yeah right And then there are shipbuilders. There are... Well, there's also Hallyu, they call it. Hallyu, the Korean wave. So the Korean wave, the drama, Korean products, and the music, it's really kind of hot and fashionable. I think this is something like, you know, I can personally understand. Korean cosmetics, my wardrobe is filled with all the Korean product. ah So, for example, there is this brand called Lineage that makes lip masks, they call it. It's just lip balm. Yeah. And Lineage sells one bottle of lip balm every second. So, wow. So so these are like, know, affordable. They go by the so-called Hallyu. And that's because it's a Korean product and it's people feel like with drama and music, lip balm. Even the noodles are very hot and the noodles as well yeah yeah spicy and hot but yeah so they're exporting more noodles because korean products and including culinary products are are very fresh and very fresh now we've spoken about all the things that are going in the right direction for korea let's take a quick break here and then i want to talk about yeah risks to this and what are some of the things that we should be concerned about sounds good
00:10:49
Speaker
So, Prunna, we've spoken about a lot of things that are going well. So they've got memory, they've got defense, they've got noodles and lip balm, apparently. So there's good growth in Korea. And a lot of investors have bought into it. And now I understand it's really the locals that have done so. It's been very volatile. But over the last couple of weeks, actually this market has been much more stable again. But there are also, of course, issues that might go in the other direction, right? There's always a sort of a risk. If you think about risk for Korea, what what what are you thinking about? I think one thing we need to remember is that these memories are highly cyclical products. Like, you know, there is a massive demand for memory, the prices increase, and that's when all the manufacturers come in and build capacity so that they can bring more chips into
Cyclicality of Memory Products
00:11:32
Speaker
the market. And as you said earlier on, that sometimes takes time, so you have a delayed response. It's delayed, but eventually there'll be a point wherein you have more supply than what there is demand for. And then prices go up And the prices go down. So, like, you know, ah memory generally tends to be highly cyclical. And now, like, you know, we've seen that um ah the Korean memory makers, but also the Chinese memory makers are spending a lot of money in setting up new factories for these chips. And because these chips have become more and more expensive, also the development and the users of these chips, they've tried to use algorithms that don't use as many memories. Exactly. Recently, we saw Alphabet came out with this algorithm that will reduce the demand for chips. But I would say these are still early days. It takes time before these products get commercialized. But of course, there is a risk that probably in future, these AI models will not need as many chips as they do now. yeah So while demand exceeds supply now, at some point in time, it will be the other way around. It could be the other way around. Yeah, and but also oil is is an issue in the Middle East. So oil, high energy prices is a concern for all the economies across the world, but also for memory makers because these are highly energy intensive processes. yeah It's just not oil prices.
00:12:48
Speaker
Helium, availability of helium. A lot of helium that comes into this part of the world, like in Taiwan and Korea, comes from Middle East. And we need this helium in order to build these more efficiently. Yeah, to build these chips more efficiently. And with the ongoing conflict, if it impacts the availability of helium, this would have an impact on the earnings of the companies or the chips that they can build in the system.
Summary & Potential Risks
00:13:11
Speaker
Good. So just to put it all together, Korea has been on an absolute tier over the last year, year and a half or so. It's been incredibly volatile as well. So we understand it as well. There are all sorts of risk, of course, to this story.
00:13:24
Speaker
Strong growth, but it comes always with risks. But it's really been a market that received a lot of attention in in public media amongst investors, of course, as well. Thanks a lot for enlightening us here. And we'll have to revisit maybe Korea at a later stage this year to see yeah if these risks have materialized and what the story is by then.
00:13:41
Speaker
Thanks lot for now. Thanks for having Helen. And that's a wrap for this week's episode. Great to have you
Conclusion & Subscription Reminder
00:13:47
Speaker
with us. And for any new listeners, please do subscribe to Under the Banyan Tree wherever you get your podcast.
00:13:53
Speaker
While you're there, give our sister podcast, The Macro Brief, a listen to. From all of us here in Hong Kong, bye for now. Under the Banyan Tree is an HSBC Global Investment Research production. Our producer is Graham Mackay, and he's the guy who made sure that we have a memory chip in here recording this particular episode.
00:14:11
Speaker
Take care and talk to you again next week.