AI and Trump: Keys to Korean Stock Picks Amid Political Uncertainty

As the Korean economy braces for potential changes under a second Trump administration, investors are turning their attention to artificial intelligence (AI) as a key driver of growth and a potential hedge against political uncertainty. With the U.S. presidential election approaching, Korean stocks have been volatile, but AI-focused companies have emerged as attractive investment opportunities.

The market size in the Artificial Intelligence market is projected to reach US$3.27bn in 2024, with an annual growth rate (CAGR 2024-2030) of 28.48%, resulting in a market volume of US$14.71bn by 2030. In global comparison, the largest market size will be in the United States (US$50.16bn in 2024). This growth is driven by advancements in technology and increased investment, making AI a promising sector for investors.

Investors' frenzy over artificial intelligence drove the largest quarterly foreign inflow to South Korean shares in the first three months of 2024, contributing to a global rally in AI-related stocks. Overseas investors bought a net $12.2 billion of local stocks, with chipmakers like Samsung Electronics Co. and SK Hynix Inc. being top recipients. This wager propelled foreign ownership of the benchmark Kospi to 34.42%, the highest since the second quarter of 2021.

However, political uncertainty looms large, with Donald Trump's return to the White House potentially having a considerable impact on the Korean economy. Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok warned that Trump's policies, such as higher tariffs, could lead to a significant impact on the Korean economy if implemented. The Korea Institute for International Economic Policy (KIEP) warned that South Korea's total exports could decrease by up to $44.8 billion, and its real gross domestic product (GDP) could decline by 0.67% if the U.S. imposes universal tariffs on South Korea.

Amid this political uncertainty, AI-focused Korean companies have emerged as attractive investment opportunities. These companies are at the forefront of AI innovation and implementation, making them well-positioned to drive growth in the Korean economy. Some of the key players in this space include:

1. Samsung Electronics Co. - A global leader in electronics and technology, Samsung has been actively investing in AI and is a favorite among overseas investors. In the first three months of 2024, overseas investors bought a net $4.1 billion of local stocks, with Samsung being one of the top recipients. Samsung's AI efforts include developing AI-powered semiconductors, displays, and other electronic components, as well as AI-driven software and services.
2. SK Hynix Inc. - Another major Korean company, SK Hynix is a global leader in semiconductor manufacturing. The company has been investing in AI and machine learning technologies to improve its manufacturing processes and develop new AI-driven products. In the first quarter of 2024, overseas investors bought a net $1.3 billion of SK Hynix's local stocks. SK Hynix's AI initiatives include AI-powered memory solutions and AI-driven data centers.
3. Naver Corporation - Naver is a leading internet company in South Korea, known for its search engine and messaging app, Line. Naver has been investing in AI and machine learning to enhance its services and develop new AI-driven products. Naver's AI initiatives include AI-powered chatbots, AI-driven content recommendations, and AI-powered advertising platforms.
4. Kakao Corporation - Kakao is another major internet company in South Korea, known for its messaging app, KakaoTalk. Kakao has been investing in AI and machine learning to improve its services and develop new AI-driven products. Kakao's AI initiatives include AI-powered chatbots, AI-driven content recommendations, and AI-powered advertising platforms.

To balance the potential risks and rewards of investing in AI-focused Korean companies amidst political uncertainty, investors can consider the following strategies:

1. Diversification: Spread investments across various sectors and companies to mitigate risks. While AI is a promising sector, it's important not to put all eggs in one basket. Diversifying investments can help reduce the impact of political uncertainty on the overall portfolio.
2. Monitor regulatory changes: Keep track of regulatory developments in South Korea and the U.S. to anticipate potential impacts on AI-focused companies. For instance, changes in trade policies, tariffs, or investment requirements could affect Korean companies' operations and profitability.
3. Evaluate companies' exposure to U.S. markets: Assess the extent to which AI-focused Korean companies rely on the U.S. market. Companies with lower exposure to the U.S. may be less affected by potential trade disputes or policy changes.
4. Consider companies' technological capabilities: Invest in companies with strong technological capabilities and competitive advantages. These companies may be better equipped to navigate political uncertainty and maintain their market position.
5. Engage with company management: Maintain open communication with company management to stay informed about their strategies for addressing political risks and uncertainties. This can help investors make more informed decisions about their investments.
6. Monitor market sentiment: Keep an eye on market sentiment and investor behavior. If political uncertainty leads to a sell-off in Korean stocks, it could present an opportunity to buy quality companies at discounted prices.
7. Stay informed about geopolitical developments: Keep up-to-date with geopolitical events and their potential impact on Korean companies. For example, the outcome of the U.S. presidential election and the policies of the incoming administration can significantly influence the investment landscape.

By following these strategies, investors can better balance the potential risks and rewards of investing in AI-focused Korean companies amidst political uncertainty. As the Korean economy navigates the challenges posed by a potential second Trump administration, AI remains a key driver of growth and an attractive investment opportunity.