(The views expressed here are those of the author,

the founder and CEO of Emmer Capital Partners Ltd)

By Manishi Raychaudhuri

HONG KONG, March 27 (Reuters) - The Iran war has turned

South Korea into Asia's most volatile stock market. The panic is

real, but any fears about massive value destruction probably are

not.

In the two trading days after the conflict began on February 28,

the benchmark KOSPI stock index fell over 18%, posting

its worst-ever daily selloff. It then rebounded almost 10% the

next day. More than three weeks later, the market is still

struggling with volatility.

The KOSPI is partly a victim of its own success, as it had

rallied sharply before the onset of the conflict, soaring more

than 100% over the previous year. Investors facing uncertainty -

and often the need to raise cash - sold what they had made money

on.

Unsurprisingly, the most liquid Korean stocks in technology,

industrials, chemicals and consumer discretionary were hit

hardest.

The conflict also made the earnings outlook for some Korean

companies appear vulnerable, especially after Iran mostly closed

the Strait of Hormuz - the narrow waterway through which roughly

20% of the world's energy previously travelled.

Korea received 70% of its crude and 30% of its gas from the

Middle East in 2025, all of it transiting through the strait,

Korea International Trade Association data shows. The country's

energy mix remains heavily skewed toward fossil fuels: 37% oil,

22% coal and 20% natural gas, according to the International

Energy Agency.

South Korean President Lee Jae Myung on Tuesday called for a

nationwide energy-saving campaign, asking the top 50

oil-consuming businesses to cut use.

The broad risk is hard to dismiss. A prolonged energy

disruption would push up the country's input costs, stoke

inflation and squeeze corporate margins. The Korean won

has compounded the pressure, weakening sharply since the war

began, which threatens to trigger capital outflows if the slide

continues.

Yet despite all these risks, several of the underlying

strengths that boosted Korean equities before the war remain

unchanged and could re-emerge in investors' consciousness once

the conflict subsides.

EARNINGS BOOM ENDURES

The earnings outlook for Korean equities remains strong

despite the wartime anxieties.

Korea has seen the sharpest rise in consensus

earnings-per-share (EPS) estimates among major Asian markets

over the last year. Importantly, these have continued to climb

even with the outbreak of the Middle East conflict, suggesting

analysts remain bullish on the main drivers of profit growth

despite energy shortage concerns.

The technology sector has driven the bulk of the upgrades,

most notably semiconductors, as the artificial intelligence

revolution shows no signs of slowing. But utilities, financials

and energy have also contributed meaningfully, as have defence

exporters. Geopolitical conflict should continue to support the

latter.

What is more striking is that, even after a 40% rally in

Korean equities since late October, the KOSPI's 12-month forward

price-to-earnings (P/E) multiple has actually declined by 28%,

based on FactSet consensus estimates.

Earnings-per-share forecasts have risen 80%, while share

prices have lagged behind. The result is a market that looks

cheaper on forward earnings even after a strong run. This

debunks the common myth that Korean equities have become more

expensive since last year's rally. They have not.

UNPACKING MISCONCEPTIONS

A second common myth about Korean stocks is that they have

become a "crowded trade." While Samsung Electronics ( SSNLF )

and SK Hynix, two dominant players in the global

memory market, did appear somewhat overbought until the recent

selloff, the broader market tells a different story.

Foreign investors sold a net $36 billion of Korean equities from

November through March 25, with the selling starting well before

the latest conflict began. Moreover, since January 2020,

foreigners have cumulatively sold $48 billion of Korean

equities, leaving them underweight.

A third misconception about this market is that investing in

Korea is simply a bet on the semiconductor giants.

But even though AI infrastructure hardware stocks remain the

obvious leaders, Korean prowess is also well established in

defence equipment, shipbuilding, heavy engineering, base metals,

automobiles, cosmetics, retail, e-commerce and entertainment.

Most of these sectors are forecast to grow earnings by more than

20% over the next two years, according to FactSet consensus.

They are also, in many cases, attractively valued, with P/E

multiples significantly lower than their forecast earnings

growth.

There is one caveat here. Energy-intensive sectors such as

chemicals, heavy engineering and base metals - which have also

enjoyed upgrades - face a serious risk of earnings deterioration

if war-related disruptions persist.

GOVERNANCE AND VOLATILITY

Alongside the earnings outlook boom, Korea's strong equity

performance over the past year has also been propelled by

corporate governance reform, most notably Seoul's "Value Up"

programme to help boost shareholder rights.

While progress on that front remains positive, the government

may also need to curb retail speculation if volatility is to

come down. Retail traders account for roughly a third of Korea

Exchange daily turnover and often use leveraged derivatives,

magnifying swings in both directions.

Regulators have taken steps to restrain speculative activity and

certain controversial trading practices, including illegal short

selling. However, the recent surge in technology stocks, where

leveraged positioning was heaviest, shows more remains to be

done.

The war's trajectory is uncertain, and a prolonged energy

shock could upend Korea's economic outlook. But when zooming in

on Korean equities' current fundamentals - and foreign owners'

low exposure - there is plenty of reason to believe the war may

turn out to be a mere pause in Korea's rally.

(The views expressed here are those of Manishi Raychaudhuri, the

founder and CEO of Emmer Capital Partners Ltd and the former

head of Asia-Pacific Equity Research at BNP Paribas Securities.)

Enjoying this column? Check out Reuters Open Interest (ROI),

your essential new source for global financial commentary.

Follow ROI on LinkedIn and X.

And listen to the Morning Bid daily podcast on Apple, Spotify,

or the Reuters app. Subscribe to hear Reuters journalists

discuss the biggest news in markets and finance seven days a

week.

(Writing by Manishi Raychaudhuri;

Editing by Marguerita Choy)