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

According to analysts, the economic fundamentals and company specific factors that underlie South Korea's equity markets are much the same now as they were prior to the volatility caused by the US-Iran war. Following the devastation created by the military conflict on February 28 and the subsequent massive drop of approximately 18% in the KOSPI index (the largest one day loss in the KOSPI history), the KOSPI gained approximately 10% over its next trading session.

Following the initial plunge of the KOSPI, South Korea became the most up and down major market in Asia since early Feb 03 as investors sold South Korean stocks due to rising crude prices and fears of supply disruptions owing to South Korea's heavy dependence on Middle Eastern countries for roughly 70% of its crude oil requirements. On Friday, February 8, the KOSPI was trading at approximately 5,460, which represents a decline of about 3.22% from the previous week, but a gain of about 29.57% from the beginning of 03.

The decline in South Korean equities as described by investors has been characterized as panic selling since the prices for many South Korean equities have become completely detached from their underlying business fundamentals rather than due to any declines in corporate health or growth expectations. Although the majority of value during the recent liquidation of the KOSPI equities was found in the semiconductor and other technology sectors which had previously contributed to the KOSPI's emergence as a leading performer among emerging market equities, continue to be benefitted by growth in AI and continued demand for semiconductors.

Increasing energy prices due to the conflict have created a strain on South Korea’s fuel-dependent economy; thus, resulting in capital outflows and widening fluctuations in the South Korean won. However, the existence of solid regulatory frameworks, credibility of the central bank, and diversified export base means that Korean equities are likely to perform better during the current geopolitical turmoil than their competitors, possibly allowing value investors to take advantage of attractive valuation points once market volatility recedes.

The ongoing sell-off in the Korean equity markets has lowered the valuation of equities across the board, as price-to-earnings ratios have fallen and are now at a discount from pre-war levels relative to regional benchmarks. If the current war continues without further deterioration of the supply of crude oil, then any stability of the price of oil, or progress toward a resolution to the conflict, may also provide for renewed inflows of capital into Korea and a resulting capital recovery in the stock market in Seoul.