Conflict in the Middle East: Why Did South Korean Shares Get Hit So Hard?

The South Korean market just faced what some have labelled its “Lehman moment,’ as the KOSPI dropped 12.4% on the back of the ripple effects of the Middle East conflict. Seoul was hit harder than any other global tech hub.

Some on PRS’s risk governance board discussed this event this morning with clients as it reminded some of us of past crashes in Asia – albeit for different reasons.

What drove prices down?

1/ The 75% Oil Trap: South Korea’s 98% energy import dependency makes the Strait of Hormuz blockade a direct threat to industrial survival.
2/ Won in Crisis: The KRW has breached the 1,500/USD mark, triggering a massive exit by foreign institutional investors.
3/ Tech Sector De-risking: Large firms like Samsung (off -11.7%) and SK Hynix (down -9.6%) are seeing an aggressive unwinding of the 2026 AI rally.

The government responded by deploying a ₩100 Trillion ($72B) Stabilization Fund. Historically, these interventions trigger 16-30% rebounds within 30 days.

But what does the ICRG data say and what is revealed by the empirical research?

Government Stability is certainly key but Investment Profile is also determinative with studies by Campbell Harvey noting three reasons:

1/Discount Rate Sensitivity: When the Investment Profile improves, the “country risk premium” falls. This immediately lowers the discount rate applied to future corporate cash flows, causing stock prices to rise even if earnings haven’t yet recovered.
2/ Foreign Direct Investment (FDI) Signaling: Institutional and foreign investors use this score as a “green light.” A rising Investment Profile score often triggers a shift from net selling to net purchasing by foreign funds, which historically provides the liquidity needed for a KOSPI breakout
3/ Governance as a Hedge: In times of “war-related volatility,” assets in countries with stable Investment Profiles (like South Korea) tend to outperform those in regions where legal rights are ambiguous, as seen in the recent divergence between South Korean and other regional indices.

CHRISTOPHER MCKEE, PHD CHIEF EXECUTIVE

Christopher McKee is PRS’ CEO and Owner. An international political economist, global investor, entrepreneur, and author, Chris received his PhD from Queen’s University (Canada) and has been involved in the field of geopolitical risk, limited recourse financing, and private sector development for the past 25 years.