As the Kospi's relentless rally extends, warnings of overheating are growing louder in tandem. The domestic stock market's capitalization has surged to more than twice South Korea's gross domestic product, fueling bubble fears, while the "fear index"—which typically falls when share prices rise—has unusually spiked alongside the market. Macroeconomic headwinds are also piling up, including oil-price jitters stemming from the Middle East, a potential shift toward rate hikes, and elections at home and abroad. Experts advise investors to manage risk by sticking close to semiconductors—the market leader with solid fundamentals—rather than chasing laggards out of FOMO (fear of missing out).
According to the Korea Exchange on the 6th, the Buffett Indicator—the Kospi's market capitalization (6,743 trillion won) divided by nominal GDP (2,650 trillion won)—stood at 256.56%. The gauge has surged from around 154% at the start of the year, surpassing the U.S. market's 225.9%. Proposed by Warren Buffett, the "Oracle of Omaha," the indicator is used to assess whether a stock market is in bubble territory, with readings above 100% considered overvalued.
The Kospi 200 Volatility Index (VKOSPI), dubbed Korea's "fear index," also jumped 7.52% to 60.07. The fear index typically spikes when the market plunges, but it has unusually surged alongside the rally. Analysts say risk-averse demand is flowing into the options market's volatility gauge amid anxiety over the market's peak. Accordingly, brokerages assess that the market has technically entered a short-term overheating zone. Shin Seung-jin, head of investment information at Samsung Securities, said, "Technical indicators suggest short-term overheating signals that could prompt a pause in the index." As seen in March when the Kospi plunged on the Middle East war, the recent rapid rise has heightened caution that even a minor event could trigger a sharp decline.
Among the potential risks threatening the rally are inflationary pressure from high oil prices and the associated possibility of rate hikes. With a resolution to the Middle East crisis surrounding the Strait of Hormuz still elusive, the vicious cycle of geopolitical risk driving oil prices higher over the long term and in turn stoking inflation remains a key variable that could rattle the market in the second half.
The direction of interest rates amid soaring prices is particularly threatening. The 30-year U.S. Treasury yield recently broke above 5%—long regarded as a psychological threshold—while some observers expect Korea's benchmark rate could rise as many as two times within the year. Lee Jin-woo, head of Meritz Securities' research center, warned, "Gradual rate increases on the back of a strong economy are manageable, but a rapid surge in rates over a short period could deliver a significant shock to market liquidity."
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The fact that artificial intelligence (AI) infrastructure investment, which is driving global equities, is heavily built on leverage (debt) is expected to amplify the impact of any rate shock. In a recent second-half outlook report, LS Securities assessed that Big Tech's capital spending has become a rate-sensitive asset as the market enters a "debt-based investment cycle" in which costs must be borne. Hong Chun-wook, CEO of Prism Investment Advisory, noted, "AI investment shows no signs of slowing for now, but since most Big Tech firms are leveraged, interest rates are the only factor that could put the brakes on investment."
Political uncertainty at home and abroad could add to volatility. Observers point to the potential for large-scale foreign capital outflows or profit-taking around Korea's local elections in June, now a month away, and the U.S. midterm elections in November, which could reshape the global policy landscape. LS Securities cautioned, "There is a recurring tendency for an 'October surprise' to sway the race just before the U.S. election, and the risk of a budget shutdown remains as the fiscal year ends in late September."
Experts stressed that investors should weather the volatility by sticking close to market leaders such as semiconductors and power equipment, whose earnings have been proven. The message also serves as a warning to investors swept up in FOMO who are chasing relatively lagging thematic or overlooked stocks. Kim Hak-kyun, head of Shinyoung Securities' research center, said, "With little evidence to dampen expectations for semiconductors, it is difficult to expect a broad-based rotation."
Kang Dae-kwon, CEO of Life Asset Management, also voiced concerns about fatigue from the short-term surge and FOMO, saying, "There is a widespread urge to reach beyond semiconductors into other sectors, but at times like this, investors should instead approach market leaders with proven earnings with conviction."
