Tariffs turn into opportunity: Potential upside for the South Korean market near 60%

• The US has imposed a 25% tariff on South Korean steel imports, but the impact on South Korea’s GDP is expected to be minimal.

• South Korea plans to impose tariffs of up to 38% on Chinese steel imports to counter US tariffs while protecting its domestic steel industry.

• POSCO, the country’s largest steel producer, suffered losses due to falling global prices; however, expected production cuts in China may support a recovery in corporate profit margins.

• Despite currency depreciation and market volatility, the South Korean stock market remains attractive, with the KOSPI Index projected to have a 58.2% upside.

The KOSPI Index fell 3.3% last Friday, mainly due to concerns over the US tariff hike. In addition, the South Korean government recently lowered its 2025 economic growth forecast from 1.9% YoY to 1.5% YoY, expressing concern about the impact of tariffs on the local economy. Is the South Korean market still worth being optimistic about?

The US Eliminates South Korea's Steel Import Tariff Exemption

The US announced last week that it will terminate the tariff exemption for steel products imported from South Korea and other countries on 12 March and begin imposing a 25% tariff. As shown in Figure 1, 10% of US steel imports come from South Korea, while other major importers include Canada, Brazil, and Mexico. On the other hand, the US accounts for 9.8% of South Korea's steel exports, making it the third largest exporter, and most of the steel shipped to the US supports industries such as automotive and electronics manufacturing. According to the International Trade Administration, US steel exports account for only 0.2% of South Korea's GDP. Therefore, we believe that the impact of the elimination of US tariff exemptions on South Korea’s economy will be manageable.

Figure 1: US Finished Steels Imported Countries and Exported Countries of Korea’s Steels

In response to the impact of US tariffs on South Korea's local steel market, the South Korean government plans to announce tariffs of up to 38% on steel imported from China.  In 2024, South Korea imported 8.77 million tons of steel products from China, accounting for nearly 60% of South Korea's total steel imports. In recent years, China's overcapacity in raw material production has led to falling prices as it competes for foreign orders. This has increased South Korea's dependence on imported Chinese steel, weakening the local steel market. The reimposition of tariffs on steel imported from China is intended to offset the effect of tariff exemptions with the United States and protect the demand and profits of Korean steel companies.

POSCO is the largest steel producer in South Korea, with a market share of over 50% in the South Korean steel market. In 2024, global steel prices were dragged down by China's oversupply, leading to lower prices. As a result, POSCO's operating profit margin fell to a new low of 2.99% (Figure 2), causing its share price to drop by nearly 50% that year. We expect that as the tariffs are implemented, China will reduce crude steel production by 50 million tons in the second half of the year, which will be beneficial for commodity prices. Consequently, corporate operating profit margins are expected to improve.

Figure 2: POSCO’S Operating Margin (%)

AI Drives Earnings Growth of Technology Companies

We believe that the stocks benefiting from AI are not limited to upstream industries, such as infrastructure and semiconductor sectors, but are even more prominent in applications. The communications industry is one of the fastest adopters of AI, accounting for 7% of the overall index. We expect the industry to grow by nearly 50% YoY this year.

NAVER is one of the top 10 components of the index. The company recently announced its 2024 results, showing that cloud service revenue is expected to grow at a steady pace. Since launching HyperCLOVA X, a hyperscale language model, NAVER has been piloting a variety of AI products. Its ability to understand Korean is stronger than that of foreign generative AI models, making it widely used by local users. This, in turn, strengthens user dependence on NAVER’s ecosystem.

NAVER recently upgraded HyperCLOVA X, describing it as more cost-effective and efficient than the previous generation, and is committed to narrowing the gap with China’s DeepSeek. This highlights South Korea’s ongoing efforts to catch up with China and the United States in AI development.

Last year, NAVER successfully integrated its AI technology into several flagship services, such as search and maps. In the first half of this year, it launched an AI-powered shopping application, Naver Plus Store, to align with the trend of personalised shopping. The app provides tailored recommendations and promotions based on user preferences and needs. For example, the US e-commerce platform Shopify has significantly improved its gross profit and monetisation capabilities since integrating AI-powered personalised assistants for merchants and buyers last year.

Figure 3: Naver’s Business Revenue

Policy Support May Help Stabilize Currency Depreciation

The continued weakening of the Korean won over the past year has also been a factor affecting stock market performance. One key reason is that the Bank of Korea (BOK) has taken a more aggressive approach to cutting interest rates. In February, the BOK cut interest rates by another 0.25% to 2.75%, causing the won to weaken further. In response, the local government recently announced plans to relax controls on foreign exchange inflows and allow export companies to obtain foreign exchange loans for domestic facility investment. The central bank stated that the latest measures aim to address imbalances in the foreign exchange market and curb depreciation pressure on the won.

Furthermore, local inflation has slowly rebounded to over 2% in February, mainly due to currency depreciation, which has led to higher import costs and imported inflation. Therefore, we believe South Korea has limited room for further interest rate cuts. With the support of new policies, the local currency is expected to rebound, which in turn should support the profit growth of South Korean multinational companies.

Investment Recommendations

Stock markets have been increasingly volatile in recent months due to uncertainty surrounding Trump's tariff policy, and South Korea has inevitably been affected. Regarding Trump’s steel tariffs, we believe that the impact is manageable. Additionally, the government's anti-dumping measures on Chinese steel helps protect the local industry. Given recent market movements, we believe that steel companies have already absorbed the negative impact of these developments.

We are re-examining the potential upside for the South Korean stock market, which continues to benefit from AI development. Similar to the US stock market, South Korea's AI sector is not only focused on semiconductor production but also on applications, such as in the communications industry. With this in mind, we maintain our 4-star 'Very Attractive' rating on the South Korean stock market, projecting a potential upside of 58.2% for the KOSPI Index, based on a reasonable P/E ratio of 12X.

For investors looking to capitalize on growth opportunities in South Korea, we recommend JPMorgan Funds – Korea Equity A (Acc) USD and Franklin FTSE South Korea ETF (NYSE: FLKR).

Table 1: The KOSPI Index’s earnings as of FY2027

The Research Team is part of iFAST Financial Pte Ltd.