Why South Korea's Market Remains Risky Despite Tariff Relief Gains

The recent tariff relief from the U.S. in April 2025 sparked a 5% intraday rally in South Korea’s Kospi index, offering a glimmer of hope for investors. However, beneath the surface, a mosaic of political instability, structural economic weaknesses, and unresolved trade tensions paints a far bleaker picture. Despite the short-lived rebound, South Korea’s market remains a risky proposition for investors, with fundamental challenges that could prolong its bearish trajectory.

A Bear Market in Need of More Than a Tariff Pause

The Kospi’s 9.6% decline in 2024 marked its worst annual performance since 2008, and its Q1 2025 contraction of 0.2% quarter-on-quarter (QoQ)—the first such decline since 2020—underscores the fragility of the recovery. While the 90-day tariff pause on U.S. imports (excluding China) alleviated immediate pressure, the broader economic outlook remains clouded.

The construction sector, a key growth pillar, has been gutted by restructuring and reduced investment, falling 12.4% year-on-year (YoY) in Q1. Meanwhile, domestic demand—a critical driver—contracted by 0.6 percentage points (ppt) due to weak private consumption and government spending cuts. Exports, though marginally supported by a weaker won, fell 1.1% QoQ, as automotive and semiconductor sectors grapple with U.S. tariffs and global demand slowdowns.

Tariff Relief Isn’t Enough

While the U.S. paused tariffs on South Korean goods, the 25% tariffs on steel and autos (excluded from the pause) remain a Sword of Damocles. South Korea’s automotive sector, its third-largest U.S. export, faces a potential 50% export decline, risking 2.5% of GDP. Companies like Kia, which reported record sales in 2024, still see costs rise: its steel tariffs alone could add $140 million annually.

The tariff pause is a temporary reprieve, not a resolution. U.S.-South Korea trade negotiations, delayed by South Korea’s political vacuum, remain unresolved. With the U.S. also raising tariffs on China to 125%, the risk of further escalation looms large.

Political Gridlock Deepens Uncertainty

The impeachment of President Yoon Suk-yeol and the potential election of a new leader by June 2025 could stabilize the political landscape. However, the prolonged leadership vacuum has already delayed critical decisions, including fiscal stimulus and trade talks. Analysts warn that a prolonged election campaign could further stall reforms.

The Bank of Korea (BOK) has already downgraded its 2025 GDP growth forecast to 0.4%, from 1.5%, citing political and trade risks. Even if a new administration takes charge, the BOK’s 2.75% benchmark rate—held steady despite inflationary pressures—highlights the central bank’s tightrope walk between supporting growth and maintaining currency stability.

Corporate Earnings Reflect Sectoral Struggles

Corporate performance is mixed, with winners and losers clearly defined. Shinhan Financial Group thrived on overseas profits and buybacks, posting a 7% gain in 2024. Meanwhile, Samsung Electronics—a bellwether for tech—saw its stock plunge 40% in 2024, reflecting broader market pessimism about semiconductors. Even Kia, despite record sales, saw its stock drop 8%, as investors priced in tariff risks.

The KOSPI’s P/E ratio of 9.39 (as of January 2025) suggests undervaluation, but this may reflect discounted expectations rather than a buying opportunity. As JPMorgan warns, the economy faces a 60% recession risk due to lingering trade shocks.

When Could the Tide Turn?

A sustainable recovery hinges on three factors:
1. Political stability: A new administration must prioritize trade negotiations and fiscal stimulus.
2. Trade resolution: A permanent tariff deal with the U.S. to avoid a 2.5% GDP hit.
3. Corporate resilience: Semiconductor and automotive sectors must adapt to tariff pressures, perhaps through U.S.-sourced materials (to qualify for tariff exemptions).

However, risks abound. The BOK’s leading composite index signals weakening momentum, and sectors like construction and semiconductors show no signs of quick rebounds.

Conclusion: Patience Required

While the Kospi’s tariff-driven rally in April 2025 was heartening, the data tells a cautionary tale. With GDP contraction, sectoral collapses, and unresolved political and trade risks, South Korea’s market remains vulnerable. Investors should proceed with caution, awaiting clearer signals of stabilization—such as a resolved trade deal, a new president, and a rebound in domestic demand. Until then, the bears still hold the upper hand.

The Kospi may have flirted with a recovery, but the fundamentals demand more than a temporary tariff pause to justify a “buy” signal. For now, the risks outweigh the rewards.