By Craig Mellow

South Korean stocks, as you would expect, sold off in response to President Donald Trump's "Liberation Day" for import tariffs.

The iShares MSCI South Korea exchange-traded fund is down 5.5% since March 26, when the U.S. president unveiled a 25% duty on all imported automobiles. He followed on April 2 with a 25% levy on all imports from South Korea.

That dip could be worth buying on, once a little smoke clears.

Korea is certainly vulnerable. Exports to the U.S. have soared since the pandemic to more than 10% of gross domestic product, compared with 3% for China. But the most exposed companies, auto giants Hyundai Motor and Kia, account for less than 5% of the Kospi stock index between them.

Microchips power Samsung Electronics and SK Hynix, whose products are less replaceable elsewhere, make up one-third.

SK Hynix has been a hot stock, up 14% this year on projected demand for its high bandwidth memory chips for artificial intelligence. "Hynix has the best-in-class HBM chips," says Kai Wang, a senior equity analyst at Morningstar.

Samsung, which sells everything from chips to televisions, has risen 10% this year. It still looks cheap after cratering in 2024, says James Lim, a partner at Dalton Investments. Shares could get another jolt if AI champion Nvidia "qualifies" Samsung's HBM3E memory chip as a component later this year.

Less known to markets are Korean defense stocks, which have been soaring on anticipated demand from a rearming Europe, Lim adds.

Shares in diversified munitions maker Hanwha Aerospace have doubled this year. LIG NEX1, which produces missile guidance systems, has jumped by half from a trough in December.

Improvements in South Korea's domestic backdrop could help cushion the blows from Washington, says Malcolm Dorson, head of emerging markets strategy at Global X ETFs.

The drama around President Yoon Suk Yeol's impeachment, launched after his abortive martial law decree in December, is coming to a close. The Constitutional Court unanimously removed Yoon from office April 4, setting up new elections which the opposition Democratic Party is favored to win.

Any incoming government will have to push corporate governance improvements that could alleviate the longstanding "Korea discount" in stocks, Dorson argues. "Nearly half the voting population are retail investors now," he says. "Either party will respond to that."

Korean stocks trade at an average price/earnings ratio around seven, compared with 18.5 for the S&P 500, Dorson reports.

Washington's Korea-bashing could in time be tempered by its need for Seoul's help in containing China militarily and technologically.

Korean tech is essential for U.S. strategic priorities like autonomous vehicles or ships that move liquefied natural gas, says Troy Stangarone, director of the Center for Korean History and Public Policy at the Wilson Center.

Korea also has carrots it can offer, like Hyundai's just-revealed $21 billion plan to expand U.S. auto and steel manufacturing by 2028. "It does look like Korea will maintain access to the U.S. market," Stangarone concludes.

Longer term, South Korea faces daunting challenges. Its working age population will shrink by a quarter over the next two decades unless rock-bottom fertility rates rise. Chinese investment and entrepreneurialism threaten its position across cutting-edge industries.

"A lot of Korean companies are at a critical juncture," Dalton's Lim says. "They need to jump forward from here or fall off and become commoditized."

For now, they may be oversold, though.

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(END) Dow Jones Newswires

April 04, 2025 21:30 ET (01:30 GMT)

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