The rise of index funds has enabled retail investors worldwide to access strategies and horizons that were previously off-limits. The ETF lens provides exposure to various themes by delegating the task of closely tracking performance to a professional issuer. A few years ago, investing in Indian or Hong Kong equity markets was either highly complex or sometimes impossible. ETFs have unlocked this access. They have also opened the door to the Korean market.

Korean equities in purgatory

For a long time, however, fans of Asian markets looked elsewhere. If you had bought an ETF replicating the Indian market at the Covid low in 2020, you would have gained approximately 150% over 5 years. With a Korean ETF, you would have earned only a third of that. Even the Japanese market outperformed the Korean market over this period. And the CAC 40 performed twice as well.

There are several reasons for this. Primarily, South Korean companies have suffered for decades from a structural "Korea Discount," which causes them to be valued significantly lower than their Japanese or Taiwanese counterparts, despite the country's economic weight. This undervaluation is largely explained by governance risks associated with the chaebols - powerful family conglomerates whose complex structures, political influence and sometimes unfavorable treatment of minority shareholders cooled investor sentiment. This situation also explains why South Korea remains classified amongst emerging markets in index terms: a Western-style economy, albeit one with legal guarantees and transparency levels that are not yet up to par.

However, things have changed.

A rocket-like catch-up

The country, aware that it was sitting on a considerable windfall, decided to legislate to improve its investor appeal. Authorities have both eased investment rules for foreigners, strengthened legal certainty, and ended certain practices deemed contrary to free investment, such as the ban on short selling.

This market expansion coincided with the explosion in electronics demand linked to artificial intelligence. Investors took some time to realize that Samsung Electronics and SK Hynix, with their bargain-basement valuations, were back at the center of the game. But as soon as the fuse was lit, the stockmarket fireworks began. Korean retail investors joined the party. SK Hynix's share price has increased tenfold in a year. Samsung's has risen 5.5 times. And the KOSPI index has doubled YTD.

Korean ETFs, which once felt a bit hollow, are now overflowing: $24bn in the iShares MSCI Korea ETF. Over $4bn for the Franklin FTSE Korea ETF. They are literally being snapped up, to the point that the Korean market, which is thought to be overheating every week, continues to break records. This rally has closed part of the discount it suffered relative to other major global hubs. This does not stop investors from continuing to play the golden age of Samsung and SK Hynix by accumulating long positions on ETFs. In doing so, they hope that the AI eldorado will smooth out the traditional cyclicality of the results of these two electronics giants, whose memory chips are in high demand.

To such an extent that, despite their recent exuberant fluctuations, both stocks remain valued at modest forward earnings multiples compared to major American AI stocks. This discount is, of course, central to the appeal they continue to exert.

As these closing lines suggest, the main limitation of all this is extreme investment concentration. The owner of a Korean ETF is overexposed to the AI theme and to two of its heavyweights, which together account for 52% of the iShares tracker and 55% of the Franklin tracker. It is a direct, high-octane bet on the transformation of the world by artificial intelligence, rather than a bet on South Korea itself.

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