KOSPI Surges 2.1% as Inflation Rises, Tech and Finance Lead Gains

On August 5, the Korean stock market opened higher and maintained a steady upward trend, with the Korea Composite Stock Price Index (KOSPI) rising 50.25 points to close at 3198.00. This followed a 2.1% year-on-year increase in the Consumer Price Index (CPI) for July, marking the second consecutive month of inflation above 2%. The core CPI, which excludes food and energy prices, rose 2% year-on-year, while the cost of living index, reflecting the actual cost of living, increased by 2.5%.

On the same day, the KOSPI index surged by more than 2% during intraday trading, with sectors such as information technology, healthcare, and finance leading the gains. The information technology and healthcare sectors rose by more than 3%, while the financial sector gained over 2.7%. Major financial stocks such as Samsung Securities and KB Financial Group rose by more than 4%, and Shinhan Financial Group increased by 3.19%. Large shipbuilding companies HD Hyundai Heavy Industries and HD Korea Shipbuilding saw gains of 2.27% and 4.15%, respectively. Other notable stocks included SK Biopharmaceuticals, which surged by more than 16%, Samsung SDI, which rose by more than 12%, Samsung Electronics, which gained over 3%, and SK Hynix, which increased by more than 2%. Major stocks such as Samsung Electronics, Hanmi Semiconductor, and LG Electronics all saw gains exceeding 1.5%.

Looking at the broader trend, the Korean stock market has seen a dramatic turnaround this year, transitioning from one of the worst-performing markets in Asia last year to the best-performing market in the region in 2025. Since the beginning of 2025, the KOSPI index has risen by more than 33%, pushing the total market capitalization above 2 trillion dollars for the first time in three years. The technology sector, which accounts for nearly 30% of the market, has risen by 45% in the year to July 25. Samsung Electronics and SK Hynix have seen gains of 24% and 55%, respectively, driven by optimism in the artificial intelligence sector and breakthroughs in new products. SK Hynix's high-bandwidth memory chips, which are key components for advanced AI servers and NVIDIA graphics processors, have seen strong market demand.

The financial sector, which accounts for 13% of the market, has also performed well, rising by 57% during this period. This growth is driven by investor preference for high-dividend assets and expectations of increased lending due to the central bank's continuous rate cuts. The industrial sector, which accounts for 17% of the market, has also seen significant gains, rising by 54%. This is driven by increased global defense and infrastructure spending.

The core driver of the Korean stock market's recent surge is the government's aggressive push for corporate governance reforms. The government aims to reduce the excessive control of chaebol families over listed companies, enhance corporate valuations, and strengthen the rights of minority shareholders to attract global investors. The government's efforts have led to a net inflow of 60 billion dollars from foreign institutions in the three months following a net outflow of 280 billion dollars from August 2024 to April 2025. The Korean won has also appreciated by more than 6% against the US dollar since the beginning of 2025, providing support for capital inflows. Analysts attribute this to optimistic market expectations for Korea's export data.

On August 5, the central bank reported that foreign exchange reserves had increased by 11.3 billion dollars to 4113.3 billion dollars as of the end of July. The government is expected to announce an economic policy outlook next week, with a growth target of 1% for the year, higher than the current projections of the central bank and the International Monetary Fund. The government plans to use a combination of fiscal, tax, and regulatory reforms to achieve this growth target. The "Korea discount" phenomenon, which has long plagued the Korean stock market, has also narrowed significantly this year. Excluding a brief period in 2023 when the AI boom temporarily boosted the market, the Korean stock market's valuation has typically been lower than that of other major Asian markets, with the exception of Japan. However, due to multiple positive factors, including rising expectations for shareholder-friendly reforms and a clearer government structure, the discount rate has fallen from around 40% during the height of political turmoil last year to below 30% by mid-July this year.

Despite the strong performance of the Korean stock market this year, it faced obstacles in early August. The government's announcement of a tax law amendment on July 31, which included an increase in the highest corporate tax rate from 24% to 25%, an increase in the securities transaction tax from 0.15% to 0.20%, and a significant reduction in the capital gains tax threshold, led to a nearly 4% drop in the KOSPI index on August 1. Multiple international investment banks have expressed negative views on this policy change. Citigroup noted that while the tax reform would not have a long-term impact on the market, it contradicts the government's "corporate value enhancement policy" and could put downward pressure on the KOSPI index. The bank also downgraded its rating for emerging market stocks in Asia to "neutral." Goldman Sachs also pointed out that the uncertainty surrounding the tax policy has increased due to disagreements within the ruling party and the formation of a new leadership team. Societe Generale noted that the amendment contradicts the government's previously stated goals for stock market development and that while the final details are subject to change, the amendment will be voted on by the National Assembly by the end of the year. On July 30, the US announced a 15% tariff on Korean exports to the US, which is lower than the 25% rate previously feared by the market. This has alleviated a major risk for Korean exporters. The US market directly contributes 15% of the total revenue of Korean companies. While the Korea-US trade agreement has reduced some uncertainty, there are still ambiguities in its implementation, and its ultimate impact remains to be seen.