South Korea’s benchmark Kospi Index has been on a record-breaking spree this month, hitting 16 intra-day records so far, propelled by a mix of AI-driven optimism about chip firms and sweeping corporate governance reforms. The rally has pushed the index past the 4,000 mark, with nearly 21% gains in October alone so far. The index has soared more than 72% this year, beating regional peers including Japan’s Nikkei 225, up 26%, and mainland China’s CSI 300 that has gained more than 19%. The rally in South Korea stocks reflects both global AI tailwinds and local structural changes that are steadily eroding the long-standing “Korea discount,” analysts told CNBC. “You can’t ignore AI — that’s a secular growth driver for the next few years,” said Arjun Jayaraman, portfolio manager at Causeway Capital Management, adding that Samsung and SK Hynix were “right in the center” of this growth. Samsung Electronics and SK Hynix together represent more than 1,000 trillion won in market capitalization, accounting for over 30% of the entire Kospi index, data provided by Yuanta Securities showed. “The primary driver behind this rally has been the recovery in the memory semiconductor sector and the resulting upward revision in corporate earnings,” said Daniel Yoo, head of global asset allocation at Yuanta Securities. Strong expectations for earnings from key players such as Samsung and SK Hynix have lifted investor sentiment, fueled further by projections of a supercycle driven by global supply shortages in memory chips. SK Hynix on Wednesday posted record quarterly revenue and profit, boosted by a strong demand for its high bandwidth memory used in generative AI chipsets. Its shares have more than tripled this year. Samsung Electronics, which reported a rebound in earnings on Thursday, with operating profit more than doubling from the previous quarter on a rebound in its chip business, has seen shares over 96%. Reforms and ‘Korea discount’ Beyond semiconductors, a shift in policy and corporate governance reforms is helping boost South Korea’s investment case. Regulators and lawmakers are increasingly pushing for shareholder-friendly practices under a “Value-Up Program,” which seeks to close valuation gaps between Korean corporates and their global peers, market experts said. “Korean equities have historically traded at a significant discount to global and regional markets due to factors often referred to as the ‘Korea discount,’ including concerns over corporate governance and low shareholder returns,” said Fiona Yang, portfolio manager at Invesco. Kospi P/E ratio is 17.65, while the Nikkei 225’s is 25.86, and China’s CSI 300 has a P/E ratio of 18.12, data from FactSet showed. “Over the past two years, however, we’ve witnessed a paradigm shift in regulatory attitudes,” Yang said. The government’s Corporate Value-Up Program , launched in 2024, is widely seen as a Korean counterpart to Japan’s corporate governance reforms under the Tokyo Stock Exchange’s “Prime” restructuring. The initiative is aimed at boosting the stock-market valuations of Korean companies by encouraging listed firms to improve shareholder returns and governance. “Expectations of the government’s Corporate Value-Up Program to eliminate the long-standing ‘Korea discount’ and bolster stock-market performance have underpinned the rally,” said Michelle Kam, investment strategist at Standard Chartered’s Chief Investment Office. “If regulators remain committed to these value-enhancing initiatives, the market could sustain its gains,” said Yang. Some of the initiatives include tax benefits for firms that join the program , particularly those increasing dividend payouts or buybacks. It pushes companies to use excess cash for dividends, buybacks and business restructuring. While foreign investors lit the fuse on this year’s rally, domestic players have taken the baton forward. Yuanta Securties’ data shows foreign institutions drove early gains late last year by piling into large-cap tech names, but local institutions and individuals have since stepped in aggressively to sustain momentum. For instance, foreign investors sold a net 1.37 trillion won in Kospi firms over last week, but the index has maintained its momentum, data from Yuanta Securities showed. Kospi continues to hit record highs, supported in large part by domestic investors, said Yuanta Securities’ Yoo. “Individual investors have stepped in with aggressive dip-buying, and local institutional investors, including pension funds, have shifted to net buying.” Despite the rally, analysts argue Korean valuations remain appealing. “If you separate export-oriented Korea from domestic Korea, domestic Korea has been a long-term under-performer,” said Jayaraman. “But if you look at things like Korean banks, they trade at something like half a book — very, very cheap multiples.” Investors are paying 14.93 times the earnings analysts expect Kospi companies to generate in the next fiscal year, data from FactSet showed. By global standards, South Korea’s semiconductor leaders are still undervalued. On a 2026 price-to-book basis, Samsung trades at 1.4x and SK Hynix at 2.2x, compared with a global semiconductor peer average of 3.0x, according to Yuanta Securities. “Korean valuations appear not only reasonable but potentially mispriced in a world reorienting around AI, automation, and energy efficiency,” Yoo said. “The rally is underpinned by fundamental improvements rather than speculative excess.” Risks and reality checks The rally in South Korean stocks is not without risks. Geopolitical tensions, U.S. rate uncertainty, and domestic asset inflation could inject volatility, said market analysts. Yoo warned that foreign flows into semiconductors are showing some signs of exhaustion, prompting increased short-term volatility, although he adds that fundamentals remain solid. Yang, too, cautions that reforms take time to implement. The current rally is also fueled by optimistic market expectations, particularly about technology earnings growth and trade policy outcomes, she said, so any disappointment in these areas could trigger pullbacks. Yet few expect a major reversal. Korea’s combination of AI leadership, policy reform, and valuations continue to offer a compelling case. “You’ve got the valuation tailwind, the secular AI growth story, and the corporate governance reforms—all of those are working together for Korea,” Jayaraman said.