‘Hallyu’ Moment: How Investors Rode the Korean Wave this Year

Even among emerging markets (EM), which saw a general resurgence of interest as investors challenged the long-standing presumption of U.S. leadership in global equity markets, South Korea was one of the best performers in the first half of 2025. The MSCI Korea Index returned more than 45% in gross USD terms, despite significant challenges from internal political turmoil as well as external trade risks, tariff threats and a weakening macro environment.¹

As international investors determine their path forward for the second half of the year, and beyond, it’s essential to understand what drove South Korea's performance, including specific structural features of its equity markets and the role of currency, especially for those investing in USD terms.

South Korea has historically performed in line with broader equity benchmarks, such as the MSCI EM and MSCI ACWI Indexes. But the second half of 2024 and first half of 2025 brought very different results.

South Korean equity markets significantly underperformed in H2 2024 and, somewhat surprisingly, the picture was quite opposite in H1 2025. The MSCI Korea Index has shown limited reaction to new tariff announcements despite South Korea’s high economic exposure to the U.S. (the second highest single-country level after Taiwan at 23%).² This resilience could, in part, reflect the increased diversification efforts by South Korean manufacturers to shift production globally.³

From a macro perspective, the country is now supported by a stable fiscal policy demonstrated by a high and stable sovereign-debt rating (Aa2)⁴ and a debt-to-GDP ratio of 49%, versus the 110% average for Organization for Economic Cooperation and Development (OECD) countries. Meanwhile, the research and development expenditure (4.9%) is the second-highest share in OECD countries.

When we examined the performance over the first half of 2025, we found:

• Outperformance was mainly driven by profit-margin expansion and currency effects stemming from a weakening USD. Margin gains were concentrated in the aerospace and defense and the semiconductor industries. Defense firms benefited from rising global geopolitical tensions while leading South Korean tech companies have capitalized on the demand for advanced-memory products.⁵
• From a valuation perspective, South Korean equities continue to trade at lower levels, relative to EM as a whole, with a forward price-to-earnings ratio of approximately 10, compared to around 13 for the MSCI EM Index, as of July 31. This so-called “Korea discount” is also observed because of investor concerns about demographic challenges, geopolitical risks, the impact of a strong USD and corporate governance
• With many investors feeling a sense of increased internal political certainty, their focus has returned to the impact of successive recent administrations’ corporate reforms. This can be partly quantified by the steady improvement in the MSCI Governance Pillar Score for South Korea, which rose from 3.3 in January 2021 to 4.9 as of July 31, 2025.

Return contributions are annualized in gross USD from Dec. 31, 2024, to July. 31, 2025.

Data period from June 30, 2003, to July 31, 2025.

Currency fluctuations can significantly influence the performance of all EM equities given their common reliance on commodity imports priced in USD as well as the impact of currency movements on export earnings. For South Korea, this sensitivity could be potentially more pronounced than the rest of EM due to the market's high exposure to the tech sector and the high economic exposure to the U.S., as referenced above.

To better understand the role of currency movements in shaping South Korea’s equity-market returns, we analyzed the relationship between the MSCI Korea Index in local currency and its counterpart in USD terms. This yielded a "dollar-return multiplier" of approximately 1.28, calculated as the slope between the two return series. This multiplier is higher than that observed for most other EM countries, as noted in a study by the Bank for International Settlements.⁶

The multiplier tells us that any movement in the local currency for the MSCI Korea Index would be amplified on average by a factor of 1.28 for an international investor in USD. Hence, for such international investors looking to tactically manage their unhedged exposure to South Korea, futures linked to the MSCI Korea USD Index may be an efficient vehicle.

Time period: Dec. 31, 1999, to July 31, 2025. The plot shows the local-currency and USD levels of the MSCI Korea Index as well as their ratio on the secondary y axis.

This elevated beta to currency movements introduces greater volatility in USD returns for portfolio managers to cope with (annualized volatility for the MSCI Korea USD Index was approximately 27% between Dec. 31, 1999, to July 31, 2025, compared to 20% for its KRW-denominated counterpart). Market participants who are more risk-averse may look to mitigate this exposure through currency hedging. In recent years, particularly following the Federal Reserve's policy shift in 2022, the MSCI Korea FX-Hedged Index has outperformed its unhedged counterpart, supported by a relatively steady interest-rate differential, while also reducing currency-related volatility.

Time period: Dec. 31, 1999, to July 31, 2025. The plot shows rolling volatility of the MSCI Korea Index based on monthly returns.

South Korean equities delivered strong performance in the first half of 2025, driven by profit-margin gains along with favorable currency effects from a weaker USD. The economy is underlined with strong fundamentals and favorable metrics from a valuations perspective. Given the high currency sensitivity, however, managing FX exposure becomes an important component for international investors, especially with continued uncertainty over the direction of the USD. Investors could either gain direct exposure through futures linked to MSCI Korea Index (USD). Their goals being to simplify operational complexity by combining equity and currency risks into a single instrument and access tactical flexibility in managing their exposures or hedging their exposures entirely through currency hedged indexes.