World-Leading Stock Rally Gets Pension Fund Support

Although the world’s top-performing market dipped on Thursday, stocks in Seoul received an extra underpinning after South Korea’s state pension fund revealed that it will significantly boost its allocation to domestic equities.

The National Pension Service (NPS), the world’s fourth-largest retirement fund, says Thursday that it will increase its allocation to Korean stocks to 20.8% by year-end, up from the 14.9% target that it set in January.

That will ease selling pressure on the fund. The pension fund is concerned that the world-leading rise in Korean stock prices could cause it to enter forced selling if it did not boost the domestic allocation.

Concerned About Forced Selling

The NPS is also addressing pressure on the Korean won currency caused by overseas investment by the NPS, allowing it to hold more Korean stocks without having to buy Wall Street assets priced in dollars, a process that contributes to the weakening of the won.

The extra allocation from the NPS, which has 1,610 trillion won ($1.1 trillion) in assets under management as of the end of February, will provide strong support for an extremely volatile index. During the market uncertainty surrounding oil prices and the U.S.-Israeli attacks on Iran, it’s been very common for the Kospi to move as much as 6% in one day.

Still, the net direction has been positive, taking the Kospi to all-time highs. It dipped 0.5% on Thursday to come very slightly off Wednesday’s record closing high of 8,229.

Kospi Has almost Doubled This Year

The benchmark Kospi index is up 94.2% this year alone, and a whopping 241.1% since the start of 2025.

That is principally a result of the Korean exchange’s heavy weighting toward it largest two components, Samsung Electronics (KR:005930) and rival chipmaker SK Hynix (KR:000660). They account for 50.8% of the entire 817-stock Kospi.

Samsung shares have quintupled in the last year, while Hynix shares are up almost 10-fold in the same period.

As a result, the Kospi is closely tracking the PHLX Semiconductor Sector index. That’s up 81.1% to date in 2026.

New Target Implies Almost 30% Upside

Nomura last week set a new 2026 target for the Korean benchmark of 10,000 to 11,000, based on how quickly Korean corporate earnings are increasing. That implies an upside of 28.3% from Thursday’s close.

The target looks easily achievable, given that the Kospi passed the 8,000 mark for the first time on Tuesday, and was only in the high 2,000s this time last year.

The caveat is that an implosion in the price of chip stocks would hit the Korean market particularly hard. Back then, a downturn in Korean exports hit the semiconductor and steel sectors particularly hard, resulting in a downturn of 30% in the Korean market, one of the preludes to the full-blown Asian Financial Crisis of 1997-98.

But a common theme in that crisis was the heavy borrowing of Korean chaebol conglomerates in U.S. dollars, debt that became impossible to serve when the Korean won depreciated. A similar situation exploded in more dramatic fashion in Southeast Asia, where a crash in the Thai baht and Indonesian rupiah caused the ratio of foreign debt to economic output escalated north of 180% at the height of the crisis. The same ratio rose as high as 40% in South Korea.

Asian companies and central banks have learnt from that lesson. Although several Asian currencies are near record lows to the U.S. dollars, the debt burden of Asian companies remains manageable, and central banks are carefully monitoring exchange rates, stepping in to defend their currencies where necessary.

Interest Rates on Hold Despite Inflation

The central Bank of Korea (BOK) on Thursday opted to keep interest rates unchanged at 2.5%, for the eighth straight meeting. This time last year it cut rates from 2.75%, but warns that its next move will likely be a rate hike.

The BOK is concerned that higher fuel prices in particular are contributing to inflation, which stands at 2.6%, above the 2.0% inflation target. The inflation rate is coincidentally the same as the central bank’s new forecast for 2.6% GDP growth this year, up from the 2.0% rate projected in February.

Two of the seven policy-board members dissented and voted for a rate hike now. But the majority are concerned enough about the spillover effects from the conflict in the Middle East to leave rates unchanged.

Will Pension Fund Have to Adjust Again?

The change in the NPS allocation takes effect at the end of next month. The pension fund will also hold 34.7% of assets in foreign stocks, 23.1% in domestic bonds, 7.4% in foreign bonds and 14.0% in alternative investments, a reallocation process designed to be implemented over the course of the rest of the year.

In fact, the NPS may be forced to increase its domestic allocation again, given the massive runup in semiconductor stocks. At the end of February, it already held 24.5% of its portfolio in domestic stocks, and 35.6% in international equities. So some rebalancing would see it buy domestic bonds, currently at 18.5% of assets, portfolio expansion likely correcting the slight overallocation of 14.6% to alternatives.

Korean Won Weakens Past 1,500 Level in 2026

The Korean won has this year weakened past the 1,500 rate to the U.S. dollar, levels it last saw during the 2009 global financial crisis. It has strengthened slightly to 1,494 as I write, but Korean officials would surely appreciate any purchasing of Korean assets in won by the NPS.

Only the Government Pension Fund in Norway, the Government Pension Investment Fund in Japan and the U.S. federal-retirement program are bigger than the NPS in terms of assets under management, according to a ranking by the Thinking Ahead Institute.

U.S. investors can tap a targeted semiconductor play that incorporates hard-to-access Hynix and Samsung shares through the Roundhill Memory ETF DRAM (DRAM). Samsung, Hynix and U.S. rival Micron Technology (MU) making up almost 75% of the exposure in a 10-stock portfolio.

Samsung last week averted a costly 18-day strike at the last minute, by agreeing a deal with unionized workers to raise wages and the bonus pool. The company’s largest two unions said on Sunday that 74% of the workers who voted on the agreement backed the deal.

The agreement sets aside 10.5% of Samsung’s chip-division operating profit for special bonuses, to be paid with company shares over at least 10 years, without a cap. That’s contingent on the division achieving annual operating profit of at least 200 trillion won ($133 billion) each year from 2026-28, and 100 trillion won ($66 billion) from 2029-36.

For Q1, Samsung Electronics achieved a record operating profit of 57.2 trillion ($37.9 billion now), which already outstrips its entire operating profit of 43.6 trillion ($28.9 billion now) for all of 2025. It’s that kind of earnings growth that Nomura believes will support Korean stocks as they push the Kospi toward the 10,000 mark.

At the time of publication, McMillan had no positions in any securities mentioned.