SEOUL, January 28 (AJP) - South Korean equities are logging a rare double win, with both the main KOSPI and the tech-heavy KOSDAQ hitting historic highs, but the synchronized rally is increasingly stirring anxiety that markets are pulling away from economic reality.
The benchmark KOSPI climbed to 5,170.81 on Wednesday, setting a fresh record, while the KOSDAQ advanced to 1,133.52. Both indices are up about 20 percent so far this year, extending last year’s outsized gains of 76 percent for the KOSPI and 36 percent for the KOSDAQ.
The surge has lifted South Korea’s total equity market capitalization above that of Germany, underscoring the scale — and speed — of the rally.
Leadership has been concentrated. Alongside heavyweight chipmakers Samsung Electronics and SK hynix, Hyundai Motor has joined the record-setting run, with its share price up more than 63 percent year to date. Optimism around semiconductor exports, autos and emerging technologies such as robotics has reinforced investor appetite.
Yet beneath the headline strength, warning signs are accumulating.
For one, equity markets appear increasingly decoupled from underlying economic conditions. South Korea’s economy contracted 0.3 percent in the fourth quarter and 1 percent for the full year, according to the Bank of Korea — the weakest performance among major Asian economies.
Even compared with Japan, which entered a low-growth era earlier, South Korea’s annual growth rate remained similar or lower, falling well short of the earlier consensus forecast of 1.8 percent.
Leverage is adding to concerns. Margin debt reached approximately 29.35 trillion won ($20.6 billion) as of Jan. 26, according to the Korea Financial Investment Association, approaching the 30 trillion won mark — an all-time high for funds borrowed to purchase stocks.
The pace of the increase has been particularly striking. Compared with about a year earlier, margin borrowing has surged by 12.51 trillion won, or 74.3 percent, amplifying fears that rising asset prices are being fueled by debt rather than earnings fundamentals.
Household balance sheets remain stretched as well. Non-bank household debt increased by 37.6 trillion won over the course of 2025. Although it edged down by 1.5 trillion won in December, the ratio still stood at 89 percent of GDP at year-end — among the highest levels in major economies.
Labor-market indicators offer little reassurance. Youth employment, a key barometer of long-term growth potential, remains mired in stagnation. The employment rate for those aged 15 to 29 stood at 44.3 percent in December, down 0.4 percentage points from a year earlier and marking the 20th consecutive month of decline, according to data released by the National Data Agency on Jan. 14.
As the gap between asset prices and the real economy widens, volatility has risen sharply. The KOSPI Volatility Index (VKOSPI) closed Wednesday at 38.68, up 11.12 percent from the previous day and more than double its level a year earlier.
Liquidity, not recovery
This is not the first time South Korean equities have diverged from economic fundamentals. Similar patterns emerged in the aftermath of the global financial crisis, during the COVID-19 stimulus cycle and in the early stages of the dot-com boom — periods when abundant liquidity converged with compelling technology narratives.
The current rally appears driven less by a broad-based recovery than by excess liquidity and concentrated inflows into specific sectors such as AI and semiconductors. According to a Bank of Korea report released Jan. 14, the M2 money supply grew 4.8 percent year on year as of November 2025. When beneficiary certificates — including ETFs, equity funds and bond funds — are included, effective liquidity growth reached 8 percent.
Investor positioning reflects this trend. Investor deposits climbed to a record 97.54 trillion won as of Monday, highlighting the scale of capital circulating around the stock market.
“The rally that began last year and continued into early this year reflects domestic liquidity conditions and expectations surrounding monetary accommodation by major economies such as Japan and the United States, rather than improvements in the real economy,” said Lee Kyung-min, a strategist at Daishin Securities.
Lee added, however, that with forward earnings per share expected to trend upward, liquidity could eventually translate into corporate investment and growth.
Others remain more cautious.
J.P. Morgan, in its “2026 Market Outlook,” warned that downside risks remain elevated amid weak business sentiment and a cooling labor market, posing potential headwinds for global equities, including South Korea. Adding to concerns, the U.S. Consumer Confidence Index fell sharply to 84.5 in January, nearly 10 points lower than the previous month and well below market expectations.
“We are not unaware that key real-economy indicators — including youth employment and construction activity — remain weak despite rising stock prices,” said a securities industry official, speaking on condition of anonymity.
“But given the belief that a buoyant stock market can support corporate investment in R&D and facilities — and potentially lift the real economy — it is difficult to openly raise the prospect of a correction.”
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