Iran war panic has lowered South Korean stock valuations without eroding underlying strength

After weeks of volatility caused by the US-Iran War, the stock market in South Korea now appears cheaper, but fundamentally sound economic and corporate drivers remain unaffected according to experts. Just two days after the start of the conflict, on February 28, 2023, the KOSPI lost more than 18; it was the largest single-day loss in history when it closed down nearly 10; from the beginning of the session to the end of the session.

The initial decline in stock prices made South Korea the most volatile major market in Asia as investors exited out of concerns about rising oil prices and possible demand disruptions due to substantial dependency there (about 70% crude imports from the Middle East). As of Friday, the KOSPI was at 5460 points, which is down 3.22% from the prior week, but up 29.57% since January 1, 2023, despite the panicked sale.

Participants have referred to the event as "panic selling" as opposed to a validation of worsening corporate health or growth prospects, as many of the large companies that comprise major share prices in the semiconductor and technology industries experienced the most significant liquidation in addition to continuing to profit from an increasing demand for AI chips.

Due to higher energy prices as a result of tensions and conflicts around the world, South Korea's economy, which has an energy deficiency, has experienced repercussions from foreign capital flight as well as increased volatility within the won currency. However, Korea's diversified base of exports, together with its stable financial foundations and high regard for the central bank and its policies, will allow Korean equities to be more resilient than other equity markets to this geopolitical nightmare; therefore, if volatility returns to acceptable levels, value investors may be looking to acquire Korean equities.

The current sell-off on equity markets has compressed equity valuations across all equity markets. The current P/E multiples for equities in South Korea are at discounts to both their pre-war average and the averages of other emerging market countries. Should there be stability in oil pricing or progress toward de-escalation of tensions between nations, this could cause an influx of new capital to South Korea, leading to an immediate, large rally in stock prices in Seoul.