South Korea's equity market has been among the year's strongest performers even as the national currency has slid sharply, according to a note from BofA Global Research. The KOSPI has climbed more than 100% since the start of 2026, led by outsized gains in major chip names, while the Korean won reached its weakest point against the U.S. dollar in over a decade.
BofA highlighted that Samsung Electronics and SK Hynix were among the leaders of the rally, gaining around 185% and 284% respectively since January. Yet the USD/KRW exchange rate briefly approached 1,560 on June 5 as the won fell to its weakest level against the dollar since 2009.
The bank said the disconnect between equity strength and currency weakness was primarily driven by record net sales of Korean stocks by foreign institutional investors. Through the latest reporting, foreign institutions have net sold $78 billion of Korean equities year-to-date, with selling concentrated in March and resurging from early May. Much of that selling pressure was concentrated in the electrical and electronics equipment sector, BofA noted.
Those outflows were large enough to outweigh wide trade surpluses. Korea posted a $27 billion trade surplus in May even as exports grew by more than 50% year-on-year, yet the size of foreign equity withdrawals far outpaced that surplus.
BofA set out a four-step mechanism to explain how flows translated into persistent currency pressure:
- An initial volatility shock from the Iran war prompted foreign investors to reduce Korean equity exposure.
- That reduction triggered a marked increase in demand for FX hedges among those investors.
- Domestic repatriation flows slowed, limiting offsetting dollar supply.
- These elements fed into a self-reinforcing loop in which won weakness and KOSPI strength interacted to sustain the divergence.
The bank provided balance-sheet context for the potential scale of hedging demand. At end-May, foreign investors held roughly 2,774 trillion won, or about $1.84 trillion, in Korean equities. BofA estimated that a 10% hedge ratio applied to the incremental exposure generated by a 10% KOSPI rise could translate into roughly $18 billion of dollar buying.
On the domestic side, South Korean households have shown only tentative and modest signs of repatriating overseas investments, aided by a tax-incentive scheme introduced by policymakers. BofA stressed the scale of these repatriations remained limited.
In its currency model, the bank found the won to be the most undervalued currency in emerging Asia relative to fundamentals. It enumerated several possible pathways that could break the feedback loop behind the won's weakness - central bank intervention in FX markets, greater hedging activity by the National Pension Service, stronger dollar conversion by exporters, or rate increases that draw carry-oriented inflows.
The note also said the Bank of Korea was seen as likely to consider raising interest rates later this year, particularly against the backdrop of an energy price shock related to the Middle East war. BofA indicated that sticky domestic inflation, partly linked to the memory chip windfall and a persistently weak won, could further tilt the BOK toward tightening.
Related market reference points from BofA's note and market data: the KOSPI's >100% rise since the start of 2026; Samsung Electronics and SK Hynix gains of approximately 185% and 284%; foreign institutional net sales of $78 billion year-to-date; Korea's $27 billion trade surplus in May; end-May foreign equity holdings of roughly 2,774 trillion won ($1.84 trillion); a potential $18 billion of dollar buying from a 10% hedge ratio on a 10% KOSPI rise; and the USD/KRW briefly touching 1,560 on June 5.