Sector Rotation in South Korea: Why Semiconductors Outperform Steel Amid Political Crossfires

The South Korean economy stands at a crossroads. With the June 3 presidential election poised to resolve a historic political crisis and U.S. trade tensions escalating, investors must navigate a landscape of stark sector divergences. While steel stocks buckle under punitive tariffs and political instability, semiconductor giants like Samsung Electronics (005930.KS) and SK Hynix (000660.KS) are emerging as resilient havens for capital. This article argues that a tactical rotation toward tech exporters—while shorting trade-sensitive industrials—is the optimal strategy until post-election clarity and tariff resolution.

Political Uncertainty: A Sector-Specific Threat Multiplier

The impeachment of President Yoon Suk Yeol in April 2025 shattered South Korea's political equilibrium. The Democratic Party's Lee Jae-myung, the frontrunner, has positioned himself as a pragmatic centrist, advocating for diplomatic stability with the U.S. and Japan while resisting ideological reversals. This contrasts sharply with the People Power Party's hardline stance on North Korea and China. The election's outcome will determine whether Seoul leans toward tech-driven growth (a DPK win) or remains mired in protectionism (a PPP surprise).

For investors, the stakes are clear: semiconductors benefit from DPK's pro-technology agenda, while steel stocks face existential risks if Yoon's allies lose power. A Lee victory could accelerate reforms to ease foreign investment constraints in tech sectors, whereas a PPP resurgence would prolong U.S.-ROK trade disputes.

The Tariff Gauntlet: Semiconductors Are Safer Than They Look

U.S. tariff policy is the second pillar of this sector divide. Steel exporters like POSCO (005490.KS) and Hyundai Steel (005495.KS) are already reeling from Trump's 50% tariffs on imported steel, implemented June 4. These levies have slashed profit margins, with POSCO's shares dropping 6% in May alone. The sector's exposure to U.S. demand—13% of South Korea's steel exports—makes it uniquely vulnerable to further escalation.

Semiconductors, however, remain in a “limbo of relative safety.” While reciprocal tariffs of 26% loom after July 9, current U.S. imports face only a 10% suspension rate until then. Crucially, Section 232 investigations into semiconductor national security risks are still pending—a delay that buys tech firms breathing room. The shows semiconductors' trade surplus widening even as steel margins shrink.

Foreign Fund Flows: Tech Outflows Mask an Inflow Opportunity

Despite headline risks, foreign investors are already voting with their wallets. South Korean semiconductor stocks have attracted $2.3 billion in net inflows since April, while steel equities saw $800 million flee—a divergence of $3.1 billion in capital reallocation. This reflects a recognition that:
1. Semiconductors are less tied to U.S. trade wars: Their global supply chains (e.g., Samsung's Austin plant) and demand from Europe/China buffer against unilateral tariffs.
2. Steel's U.S. exposure is a deadweight: 40% of Hyundai Steel's sales go to America, versus just 15% for Samsung's chip division.

The reveals foreign investors holding 28% of Samsung's shares versus 14% of POSCO's—a stark asymmetry favoring tech.

Currency and Valuation: The Won's Weakness Works for Tech

South Korea's currency has weakened 5% against the dollar since March, driven by political uncertainty and capital flight. For semiconductor exporters, this is a double-edged sword: while it boosts dollar-denominated revenue, it also raises import costs. However, tech firms' scale and pricing power mitigate this risk. Samsung's 20% margin on DRAM chips versus POSCO's 3% on steel illustrates why valuation multiples favor semiconductors (Samsung's P/E of 14x vs. POSCO's 6x).

Steel's P/E compression reflects deeper structural issues: declining global steel demand and overcapacity in Asia. The shows semiconductors trading at 6.5x versus steel's 3.2x—a gap set to widen unless tariffs abate.

The Tactical Play: Rotate Now, Rebalance Later

The strategy is clear: go long on semiconductors, short steel until post-election clarity. Key catalysts to watch:
- June 3 election outcome: A DPK win (likely) signals policy continuity favoring tech.
- July 9 tariff deadline: If semiconductors avoid the 26% rate, their valuation multiples could expand.
- PMI divergence: Monitor the manufacturing PMI—semiconductors' PMI (52) has outperformed steel's (48) for five consecutive months.

Investors should also hedge with won exposure: A weaker currency will amplify dollar-denominated returns for tech exporters.

Conclusion: The Election Is a Binary Call—Position Accordingly

South Korea's election and trade tensions are binary events with asymmetric payoffs. Semiconductors offer both defensive characteristics (global demand resilience) and upside from policy tailwinds, while steel is a pure beta play on U.S.-ROK relations. The data is unambiguous: rotate capital toward Samsung and SK Hynix, and exit steel stocks until the smoke clears. This isn't just sector rotation—it's risk management in a high-stakes game.

Act now. The next six weeks will decide who wins—and who loses—in South Korea's economic crossfire.