By Gregor Stuart Hunter
SINGAPORE, April 17 (Reuters) - South Korea's capital markets are luring back foreign buyers after a brutal March, as hopes of stability in the Middle East, a red-hot AI memory trade and Seoul's corporate governance reforms lift stocks and bonds alike.
The benchmark KOSPI has recouped nearly all of last month's 19% tumble, regaining the momentum that made it the best performing major stock index last year.
However, the rout brought into focus some of the risks of the East Asian
market, with its heavy focus on a handful of AI-linked companies and volatility far exceeding most other equity bourses.
The currency also remains stuck near 17-year lows, raising costs for the imported energy on which South Korea depends, while also limiting the scope for stimulus as policies aimed at supporting growth also risk exacerbating inflation.
Although $4.2 billion of foreign capital has poured back into South Korean stocks this month, a record $23.8 billion fled in March, LSEG data shows.
For Isaac Thong, senior investment director for Asian equities at Aberdeen Investments, the steep selloff offered an attractive re-entry point to the Seoul market.
Thong sold holdings in Taiwanese semiconductor manufacturers to buy cheaper stocks of South Korean memory chipmakers such as Samsung Electronics, joining investors angling for a slice of the profits from high bandwidth memory used in data centres.
"We're cautiously optimistic, but we think it's a megatrend," he said. "Barring a recessionary scenario, we think this trend is going to continue."
Despite its distance from the Middle East, South Korea has been hit hard by market volatility since the war started, with its open and export-centred economy highly exposed to the energy shock, particularly amid persistent weakness in the currency.
The KOSPI has seen plunges of as much as 12% in a single day followed by gains of 9%. But even after a turbulent March, the index is up 44.5% this year, building on a 75% surge in 2025.
The government is also trying to draw foreign capital with corporate governance reforms, taking aim at the so-called 'Korea Discount', a persistent valuation gap rooted in weak corporate governance among family-owned conglomerates known as chaebols.
Those initiatives have attracted activist funds, seeking the kind of returns seen last decade in Japan under former premier Shinzo Abe's "Abenomics" policies.
Amid South Korea's stock volatility, the country's bond market has been conspicuously resilient.
Korean companies raised $74.7 billion in the first quarter of 2026, according to LSEG data, maintaining the brisk pace of fundraising seen in recent years.
The benchmark 10-year government bond yield, which moves inversely to its price, has dropped 17.5 basis points this month, and touched the lowest level since February.
The outlook for Korean sovereign debt is also brightening on its anticipated inclusion in the FTSE's World Government Bond Index.
Japan's Government Pension Investment Fund (GPIF) began buying Korean treasury bonds ahead of their inclusion while Goldman Sachs Asset Management and Principal Global Investors have also expressed interest.
"Korea wasn't in any major global indexes up until now," said Riad Chowdhury, head of Asia-Pacific at MarketAxess in Singapore, who anticipates between $50 billion and $70 billion of flows from passive funds alone. "It's one of those big Asia-to-Asia trades."
For global investors, the persistent weakness in the South Korean won remains a concern, with capital outflows and safe-haven dollar demand keeping the currency near levels not seen since the Asian or global financial crises.
That has spurred repeated verbal warnings from authorities, and led South Korea's state-run pension fund to conduct strategic foreign exchange hedging operations, effectively supporting the won.
(Reporting by Gregor Stuart Hunter, additional reporting by Gaurav Dogra in Bengaluru; Editing by Ankur Banerjee and Kevin Buckland)
