Korean Stocks Keep Sizzling, as Samsung Scrambles to Supply Nvidia, Hynix on High

Can Korean stocks continue their strong run, a chip-induced rally that has seen them become Asia’s top performers?

It seems likely they can, as I said as a guest on today’s Money Talk podcast here in Hong Kong. That’s even though the benchmark Kospi is taking a breather today, ending the day down 0.9% on a mixed day’s trade in Asia.

As I noted earlier this week, South Korean stocks have raced ahead, despite geopolitical uncertainties. The run of the South Korean market is perhaps surprising to international investors, since most of its chaebol conglomerates are major exporters.

Kospi Across Key Threshold

South Korean negotiators are desperately seeking a U.S. trade deal to ward off much-higher American tariffs, trade duties that are already hurting Korean carmakers. But investors have shaken off those concerns to buy up tech stocks in particular.

The Kospi crossed the 3,000 mark on Friday for the first time since December 2021. It opened Wednesday at its high for the year, at 3,128, and despite today’s slight setback remains up 28.4% for the year. The bulk of the gains have come in June alone.

Investors are encouraged that the political chaos in Seoul is over. Then-opposition leader Lee Jae-myung was elected president on June 3 with a record voter turnout, after predecessor Yoon Suk Yeol was impeached and removed from office. Yoon had briefly declared martial law last December, a disastrous move driven largely by his administration’s very low approval ratings and graft investigations into Yoon’s wife and several top officials.

Martial Law Brings Back Bad Memories

The 6-hour martial law episode recalled South Korea’s history as a military dictatorship after the Korean War ended. It also precipitated a game of political musical chairs, with four interim acting presidents each lasting a matter of days in office. So investors are cheering the settled political picture now that Lee is securely, and democratically, elected to office.

Although Yoon was elected as a pro-business conservative, his agenda immediately ran aground, faced with a Korean congress dominated by the Democratic Party opposition. Since the June 3 vote was a snap election prompted by Yoon’s removal from office, Lee took the presidency immediately. He’s now pushing ahead with an extra budget and corporate-governance reform that should reassure investors, as does the strengthening Korean won.

But above all, this year’s rally has been driven by a rebound in memory-chip prices, as well as a rebound in the prospects of market heavyweight Samsung Electronics SSNLF (KR:005930), the largest Korean company by market capitalization.

A Different Kind of Memory

Memory-chip prices have shot up in the last 3 or 4 months. As Nomura points out in a note to clients, spot prices for the fourth generation of Double Data Rate (DDR4) chips have tripled since April, from around $1.5 per piece in to around $4.5, while fifth-gen DDR5 prices have edged up from $4.10 to $5.10.

It’s a reprieve for Samsung, which makes up around 15% of the total Seoul market capitalization, since it has been punished by investors for an overreliance on cheaper chips. The DDR4 chips are ironically suddenly in demand because producers will be phasing them out by the end of this year, to focus on higher-margin High Bandwidth Memory (HBM) chips used in Artificial Intelligence applications as well as data centers.

But the DDR4 chips have suddenly surged in demand, because companies are attempting to frontload chip stocks ahead of potential U.S. tariffs. There’s also restocking taking place.

“Commodity” cheaper DRAM chips could see growth of 10%-12% for both Samsung and rival SK Hynix HXSCL (KR:000660). Flash-memory NAND chips are set to rise 15% for Samsung and 20% for Hynix, according to Nomura’s Asia tech analyst team.

The frontloading for cheaper chips could result in weaker sales later this year. But demand for higher-grade chips will remain strong, and Samsung is upgrading its product mix to meet that demand.

Scramble to Supply Nvidia

Meanwhile, chip designer Nvidia NVDA has seen its shares crest to an all-time high, making it the world’s largest company by market capitalization in the process. And it is taking its suppliers with it.

Samsung is scrambling to qualify to supply Nvidia with chips. It looks like those efforts will be successful, removing a downside that had seen the stock punished severely.

For now, Samsung supplies its HBM chips to other customers. But it is attempting to qualify to supply them to Nvidia by August or September.

That’s behind Samsung’s original June target, but progress nevertheless. Nomura’s analysts give an 80% probability to its chips being accepted into Nvidia’s program, later than its competitors.

Hynix already supplies Nvidia, and so has seen its share price shoot up 71.1% so far this year. By contrast, Samsung has risen just 12.7%, so it has in fact been hampering the Kospi’s overall 28.4% rise.

Samsung shares stand to gain if the company can get its product mix right. The shares remain 32.2% lower than their all-time highs in January 2021, when pandemic buying of home technology sparked a rally in the chipmakers that power those goods.

Korean Won Continues to Gain

The Korean market’s recent run is supported by a dramatic change in the fortunes of the Korean won currency. The won has typically changed hands at around 1,000 to the U.S. dollar. But it has weakened significantly so far this decade, and crested to an exchange rate close to 1,500 to the dollar in April, at the height of the political uncertainty.

The resolution of that crisis coupled with ongoing U.S. dollar weakness has seen the won gain 8.8% since a peak on April 9. It’s likely the won will continue its run, giving overseas investors a currency gain if they hold unhedged Korean equities.

It’s a turnaround for a market that has long traded on the “Korea discount,” the concept that South Korean companies trade at lower multiples than their Asian peers due to corporate-governance concerns. The Korean economy is still largely controlled by a cabal of chaebol conglomerates, each run by a family that structures shareholdings to their benefit, and sometimes strikes sweetheart deals at the cost of external investors.

Pushing Market-Friendly Reforms

The Nomura team predicts that Samsung shares can challenge their 2021 highs, with a run from a closing price today of 60,200 back toward the 80,000 level. That’s an implied upside of 32.9%.

Hynix shares have already enjoyed a better run. But at a closing price of 293,000 won today, they could test 360,000 won, an implied upside of 22.9%.

Those forecasts suggest the Korean market should sustain its rally, despite ongoing weakness in its automakers. Global money managers such as Aberdeen Investments, Pictet Wealth Management and Franklin Templeton have recently added to Korean exposure, encouraged by pledges from the new administration to improve corporate reforms.

A program called “Corporate Value-up” lost steam under Yoon but should receive support from the Lee administration. Some 160 companies had unveiled plans under the program, designed to mirror the successful corporate reforms pushed in Japan.

At the time of publication, Alex Frew McMillan had no position in any security mentioned.