South Korea's equity markets are on a tear.

That Cosby Index has surged nearly seventy percent year to date, powered by tech giants like Samsung Electronics and s k Heinez, riding the global wave of AI infrastructure investment.

Adding to the momentum, Korea recently hosted the APEC Summit, welcoming both President she and President Trump and raising hopes of deeper economic ties to both China and the US.

But it's not all smooth sailing.

President e JM Jong has warned of a property market bubble.

Household debt remains amongst the highest in the world, So can Korea's well beating bullmarket continue.

You're listening to Asia Centric from Bloomberg Intelligence.

I'm John Lee in Hong Kong, and today we have Peter Kim, Managing director and investment strategists for KB Securities in Soul.

Peter, welcome back to the show.

A great good to see you again.

Peter.

It was just five months ago that you came onto the podcast, and things have obviously changed a lot.

There was a lot of apprehension about Korea just elected a new president EJM.

Young after the impeachment of the previous president, there were some concerns that some of his policies may not be business friendly.

But now five months later, as I mentioned, kree is the best performing stock market in the world.

Like, what's driven all this optimism?

Well, as I mentioned five months ago, thanks for remembering that this is probably very unconventional left wing president and that he will likely surprise the skeptics that were really over the predominant views amongst the not just the issutional investor, but even retail.

He's really prioritize economic growth and second stock market as a top policy priority.

Now, it's quite typical for incoming president to draw up, you know, almost realistic wish list of things he wants to do, and typically we will see much of those promises just fade away within months.

In this case, he's actually followed up on those priorities and promises into law, and he continues to campaign behind it, and I think the stock market is reflecting it very strongly.

I think the economic growth is lagging, but I think just the excitement and let's not forget that this is not a career only issue.

I mean, we have a global liquidity rally, we have animal spirits coming out everywhere, and Korea, I guess, is adding to that global trend into something that's unique to create, which is market reform.

So it's very healthy, very powerful.

I think the question will be, is this one of those big cyclical rallies that we see from Korea every decade or so for it to fall back into disappointment and start over or is it something that's going to be more sustaining that I think will have to see probably in the next six to twelve months.

And Peter, who has been driving this rally in terms of like who's been buying the stock, hasn't been like retail investors, Has it been local institutions or has it been like foreigners pushing it up?

Yeah, so from beginning of this year, use domestic insitutions that has gotten behind it, from the election when foreigners, after selling very strongly for almost ten months prior, they came back, and most recently we see retail investors joining it.

So it's one of those powerful rallies that it's not a sort of a zero sum where someone sells and months by then and it just sort of.

They switching hands.

But it's actually it's like a baton being passed on beginning with domestic institutions, then foreign institutions, and then most recent in retail.

Retail is obviously the most.

Powerful of the all three, and it's alobal transplanting career.

You may have heard about career retailing versus buying six billion dollars of TESTLA since COVID they bought over one hundred billion of US equities, for instance.

So if they start to.

Get behind is Raelly, which they just started a few weeks ago, then we can really look for some even bigger numbers for the market and the next six to tell months.

You mentioned that career is part of a whole global liquidity wave driving up equities.

Career is also leveraged to the frenzy in AI infrastructure spending, which is driving demand for memory chips made by Samsung and s K heinis are these the factor is driving the market?

I mean President Trump.

I call him the short termism of Trump.

What are our long term consequences?

He doesn't seem to care.

He wants results now.

He wants positive buzz to build around his policies.

He's policies are built on cutting rates like one big, beautiful bill massive stimulus on fiscal side, deregulation, cryptos right, and then most recently AI spending, So it's a trifecta plus the AI spending.

Now, you know, I find.

It very interesting that you continue to screen for rate cuts when US security markets at all time high.

I don't know if I've remember that.

But then on top of the rate cuts, then we have the stimulus physical spending.

Then you got the deregulation and the AI.

So is it that just AI or is it just rate cuts.

It's just anything that will boost up markets and the economy at the expense of some long term consequences.

But who knows when those long term consequences will come through.

Meanwhile, we live in a society where they want instant results, instant gratification, and we're seeing right now.

Are you surprised at how fast the markets have gone up?

Because there are some concerns now the Career Stock Exchange recently gave some caution, in particular to s k Heinex.

Now, I think this stock rose like was it of a sixty percent over a few months.

It's up over two hundred and forty percent earther day, and this is Korea's second biggest stock.

Yeah, yeah, can you explain.

Typically, when I see these signs, were a stock even without news or earnings upgrades, when a stock continues to go out, big stocks go up, you know, twenty percent a week or even a month.

I used to see that as a signal that we're at the peak market and that we need to now be cautious.

Nowadays, I continue to remind myself that the market structure has changed.

What used to be driven by institutional investors, asset allocators looking at whether it's country sectors or stocks based on valuations, fundamental health, you know, and then they do relatives as a location fun flows now is dominated by retail empowered by trading apps on the mobile phones.

And I have done a lot of research since last year to show that market structure has changed.

So what I used to see as a warning signals that this is the peak, I now opening up the possibility that it could be prolonged much longer than in the past, and.

It could go up much higher.

I think we can feel that in the market right how the fundamentals have really diverged from price section, so you know, I in my latest report, I remind investors that this rally is for believers, not analysts, right, And also, I think it's too soon to call the peak of the market.

So you just mentioned, you inferred earlier that retail investors have just started buying Korean equity, so you think there's a lot more to go.

Yeah, Still, they've just bought one or two billion dollars.

Now, if you consider they have about one hundred billion dollars in US equities and that they're really just started buying from COVID so within four or five years.

Now, just to give you a perspective on how big that one hundred billion dollars is.

Over the past forty years, I've looked at the create is certain troughs of the export cycle or crisis like subprime.

We've seen one or two years of trade deficit for Korea, you know, so it means that the fun flowing capital flow is flowing the opposite direction.

Forty billion dollars is bad as it got.

So if you consider, you know, every four or five ten years that Korea has.

These sort of crisis where they.

Get a momentary trade deficit, that's as forty billion is bad as it got.

We now have one hundred billion that Koreans owned in the US.

So if some of that just comes back that just gives you how powerful they could be.

Okay, and this is pretty much the first year where Korean equities or the local equities have really performed US equities, right.

Yeah, I mean, you know, obviously nowadays everyone looks at it on a calendar year, which I also it's a bit misleading.

So I looked at some charts for this call.

Last year, career massively underperformed everybody.

Right, Obviously, last year US was the biggest performer along with China.

Since beginning of last year, COSP, China Index, and SMP are round the same.

Now you can look that up on your Bloomberg from beginning of last year, the three indexes, they're sort of there plus.

A minus ten percent.

So I guess the narrative for career is that last year they massively underperformed.

This year massively upperformed.

So they made up this year a lot of what they underperformed last year.

And that's where we are.

So to print to perspective, do people say like they couldn't possibly outperform next year?

Again?

Is that well, that's not necessarily a healthful measure.

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If you like what you're hear, don't forget to subscribe and Shair Peter, are you you're sitting in Seoul and you speak to a lot of large institutional investors.

Are you seeing a lot more demand from global investors wanting to come to Korea visit kareem corporates, meet the government to invest more in career?

Absolutely no, I mean this rally this year has caught foreign investors by surprise in a big way.

So the performance for Career last year started with back in June when Samson Electronics, the biggest stock listed in Korea back then thirty percent of the market cap, missed out on NDVDYA HBM chip qualification and they massively sold Career through Samsung from that point in June.

Then, of course a few months later we had the martial law incident, so they sold Korea even more, and that led.

To a point where beginning of this.

Year, foreign invests has probably had the most underway positioning career in history that I remember.

And I told you they just started buying back career from election which was in April, and they haven't.

Bought back career.

They got back about forty billion dollars that they sold since June last year.

They bought back about half, So that tells you that they're still underway.

So a lot of the investors that I meet are asking me how sustainable it is rally because they're late two.

They want to get their benchmark back and they'll say, why should I buy?

Okay, because the ones that the sectors are stuff they like already rallied so much.

They're looking for some fundamental value or some catalyst that hasn't been priced in yet.

So it's a painful rally foreign investors.

And Peter I wanted to also mention that there is an interesting dichotomy between the Korean local equity market but also the property market.

Now, the President came on Bloomberg TV recently and President Lee said that I think he mentioned that career is in a potential property market bubble.

Which is about to burst.

Yeah, now, can you give you know, the listener like who may not be too familiar with Korea, like this, give us some flavor of how much Koreans are invested in property and how overheated is the market.

Yeah, well so, Korean property market, it has been the best investment for the past thirty years, much more than Korean stocks have been.

So as a result, Korean households one of the highest ownership of property as an asset, and as a result, on the other hand, they have one of the lowest holdings in equities and investment funds relative to US, China and Japan, they're at the lowest.

So these concerns on property comes in two ways for the left wing government because they're always very conservative and take a very cynical view of the property market.

One because it's the main cause of widening income gap and wealth gap between the middle class and the working class.

That's a political issue.

Second is that they're concerned about a possible property bubble bursting which could flow over into household that which is hushole at who's most of their collateral is the domestic property.

So one fundamental one political for those two reasons.

They're always very very cynical and negative about it.

The left wing government coming in now is trying to promote greater ownership of equities and less ownership of property.

In the long term, that will happen anyway, given the demographics, but this government wants to make that transition as quickly as possible, so they've been partially clamping down on property market while trying to promote the equity market, that's the transfer of household as.

Sets and for the benefit of the listener.

I've got some stats now.

I looked at a Deutsche Bank report and they said that the average price of an apartment in Seoul is twenty three thousand dollars per square meter, and that ranks the fourth most expensive in the world, just behind Hong Kong, Singapore and Zurich.

So it's actually more expensive than New York and London.

Do you think that career or in a Seoul is in a property market bubble?

I think some parts of Soul, And by the way, that number is probably skewed because there are some parts of Southern Salt that is ridiculous and does show signs of a bubble.

But the reason why I'm not.

So concerned that it could lead to a nation one banking crisis.

Is that that the bubbly area is such an outlier it raises the overall average.

But if you look at the areas outside of those few specific regions, it's not expensive at all yet, and certainly if you look at a broader nationwide housing market, it's even cheaper.

So while some of.

These specific areas could see possible bubble bursting or maybe one of those real decade long declines, the risk of that's spreading into a nation one property market crisis or a banking crisis is very very low.

Okay, So there's some pundits have likened you know, Koreas or Soul's property market potentially to you know, Tokyo in the nineteen eighties and maybe even China in the last decade.

It seems like you don't think that an allergy is correct.

No, I mean, certainly we are nowhere near the Tokyo, you know, Kinza property bubble that we wished to see.

And two you have to remember with Japan's comparison, not only was their property bubble, but then you had the end right around then started to double against the dollar.

That really killed their exporters.

And concurrently you had the plummeting of the birth rates just within ten years.

So I called it the trifactor of doomsday scenario for Japan.

Korea birth rate has been declining, that's for sure.

That's why people continue to sort of make that comparison with Japan.

But we don't have a property bubble.

We don't have the one strengthening.

We actually have the one weakening, as you know.

So we have these buffers that I think we'll soften that.

As far as the comparison with China, like the gradual burdensome that and that's and leading to this glood in supply or property, we don't have that dynamics that we don't have this massive, huge goo cities being built against the banking sector who has.

The issues of their own.

Korea LTB ratio loans to value has been conservatively put at fifty percent for over ten years now.

So for those who are worried.

About this leading to China like type of silent crisis, we don't have that dynamic.

So I think all of this will lead to a long term slower lower growth rate or the economy, but nothing like property crisis in China or the last decades of Japan.

Okay, you mentioned before that the current government is much more pro stocks and wants to have this wealth shift away from property into the equity markets.

And part of this has been this corporate governance reform or the value up.

Can you give us an update where is Korea in its corporate governance reforms?

So since winning the election in April, the big difference has been then not only has the new president being pro market, pro economic growth, but he has the majority of the legislative parliament, unlike the previous president who could not pass any laws through because the opposition had the majority.

So that powerful weapon that the new president came into the government with has been put into action.

So he put in laws.

To change of fiduciary duty, which is a so previous law said company's management owes fiduciary duty to majority shelders.

Changed that too overall shoholders, including minority elders.

That's a big step in terms of corporate governance.

She's also now changed the tax laws regarding dividends, which used to be at a punity forty nine percent.

They've already passed a lot of the bills through now final stages coming where it could be as low as twenty five percent.

So imagine for an.

Aging society to put dividend income tax at forty nine percent and that makes no sense, so lowering that to twenty five it's another big step.

These are laws that's.

Been talked about for over a decade, but nothing was done.

And the final point on the market reform is that you know stock marketing career admittedly, and I've been watching it for over thirty years, is that the legislators, the government, even the you know, the Chabels, they never really looked at stock market with any real importance.

It was a bit of a trophy achievement to have your company listed, but then after that it was like it's an occasional funding vehicle, but it was not something that they held in high regard.

And having that view change from a very very low base, I think that's where the long term upside could be.

There's so much they could do because they really haven't done much at all.

It's a massive.

Underachievement which they can really pick up some low hanging fruits.

Yep.

And for the listener, Chabel, you mean like these conglomer it's coming from it, like Samsung, LG and Hynda.

That's right, Peter.

You've been in Korea, you've met Korean management for many years regarding this corporate governance reform.

Are you seeing meaningful changes?

Are they really improving in terms of their capital allocation, the decision making?

Not yet.

Look, I think if you look at Korean banks, they've been the first one to really come out with a very transparent, methodical and thoughtful shaholder return policy.

We're hoping that that will then now spread over to the conglomerates.

But you know, the better ones, the.

Really globalized ones like Samsung and Hunda, already have some sort of framework ready.

They haven't been as aggressive in implementing it, but they know what the sheolders want because they're shaholders from overseas.

You know, it takes up a big part of their ownership.

But probably some of the you know, lesser known chabels, they're the ones that will probably have to get going.

And that's probably when.

You really see a share price upside, because I think, you know, Samsung can day is not like you see a massive discount to their peers.

It's always been the other ones taught us two that's always been criticized by my clients as being having no regard for memory.

She elders.

Okay, so there's still some work to do, you're.

Saying, I think so low base.

And I wanted to also talk about like this big APEC event that happened in Korea recently.

You know, President Trump and President she finally met in Korea, which led to lower tariffs and some temporary relief on the flow of rare earths.

But what about Korea.

What was the significance of having both leaders in the country.

Well, I think we're a pretty good host.

Yeah, so you know that in itself was meaningful, right, I mean, having coordinated without anyone really being upset with each other.

So I think that in itself was a success.

You might have seen.

Prior to the President Trump Benshe meeting, US and South Korea had their own little trade talks.

It came out reasonably okay, officially they agreed on a fifteen percent base rate.

The threats of adding a significantly higher carousel creant auto sector, they sort of put that aside for now.

Anyway, they've ogreed a three hundred and fifty billion career investing into US two hundred in overall investments, one hundred and fifty in shipbuilding, but on an annual basis with a cap of twenty billion, so there's some clarity, some more transparency about what they're about to do.

I think we came out okay, but we know by now though, that the Trail administration will change their mind on a dime.

So I think that you know, nothing is final with this government from the US, so just have to be vigilant and continue.

To build hopefully certain rapport.

And I'm a little concerned about the possibility of continuing to be cornered in for South Korea by two superpowers US and China, because we're in an era where those two countries would like to see countries like South Korea takes side right and economically and politically, South Korea cannot choose between the two right, we have to have both sides for many reasons.

That's going to be a challenge for most countries, but South Korea, because of its geographical positioning, even more important.

So there's a lot more challenges up ahead, and I think that's probably why the diplomatic skills and foreign affairs is going to be a very important part and what about.

The relationship with China and President she Now, there was some local newspaper reports.

I think that was speculating that maybe the relationships could be throwing.

You know, currently parts of Korean culture, especially like k pop Korean movies unofficially banned in China.

Do you think that could reverse going forward?

If they play their cards right, meaning what could be an impossible decision of choosing, Maybe you know, South Korea could position itself and maybe leverage the two sides into its advantage.

There'll be a trick, right, rather than having to choose, maybe having both US and China maybe come to Korea to win over them, which could be very, very beneficial economically.

I think that's what we'd like to see.

We've seen India do it very well until a few months ago, right, so you know, maybe we can pull that off.

There's no question that South Korea is way too important for both countries to really turn its back, no matter how aggressive they posture towards South Korea.

So I'm not that concerned.

And I think, you know, traditional left wing government in Korea is a China leaning type of policy.

South Korea left wing or riving will never turn it back.

On the US, but they have been sort of leaning on certain policies and government probably will try to warm up to China during its term.

So Peter, well, I've got you like so you're an investment strategist.

So over the next twelve months, like obviously, care has done fantastic this year, is there really particular sectors that investors should be watching out for.

Yeah, that's tough one because the market has rallied and as I mentioned earlier, as the retail investors get involved, you know, it's not so much about fundamentals valuation, it's about they will see a lot of fears rotations from different sectors, stocks, sub sectors, so trying to predict what they're going to do in the short term is almost impossible.

But stretching the time a little bit further out.

Fundamentally, I'm very very partitive on current defense industry.

I wrote a piece back in November twenty three on Career Time.

You can look it up Career Times, Peter.

Kip defense industry is emerging and nobody talked about it back then, but since then the sector has gone up almost ten times.

Now.

Those are one of those sectors.

Client Askmi, is it too late to join in now.

Korean defense sector obviously, I think everyone recognized now that the geopolitical risks are rising and not likely to come down.

Korea is well positioned.

They're very experienced that these heavy industries, you know, big backlogs, heavy cake pacts, quick turnaround thirty percent discount to the global brands.

I mean, it's a type of stuff that Koreans have done very well for forty years.

So defense sector is like that, and Korean companies are very well positioned.

And from what we can gauge, the inventory depletion because of the wars in Ukraine and also other parts of the world, has so much that they need to replenish.

But of course also you know US is telling all of its allies to raise your defense spending.

So I think I'm a very bullish It would be my top pick.

Even though I all it long time ago, I continue to see it as one of the sectors that career will do very well with.

Okay, great, Is there anything else you wanted to highlight?

I think you mentioned earlier about the market reform, and I told you that Korean banks have really shown the successful formula of a transparent shareholder policy and of course aid KB.

If you look at the sector, KB has the biggest premium now well recognized.

So I think we continue to talk about the shoulder returns.

Look at our stock and you'll find out a lot more about how much we've gotten.

All Right, it's a shameless pitch right there.

Okay, thanks Peter, all right, thanks for that, and for the listeners.

That's not investment advice, by the way, it's pure educational.

No, okay, great having you, Peter, Thank you.

Don You've been listening to Age Eccentric from Bloomberg Intelligence.

I'm John Lee in Hong Kong.

You can listen to all our episodes on Apple Podcasts, Spotify or Revy listen and this podcast was produced and edited by Clara Chan.

Thanks for listening.