Emerging Markets: How AI exports are powering Korea’s next investment opportunity

Despite strong semiconductor exports and a large current account surplus, the Korean won remains near multi‑decade lows due to capital outflows, creating a disconnect that may present medium‑term value, according to Pendal’s EMERGING MARKETS team

• Semiconductor boom, yet won remains weak
• Capital outflows drive currency disconnect
• Learn more about Pendal Global Emerging Markets Opportunities Fund

IN ONE of the more unusual current developments in emerging markets, South Korea is experiencing a powerful export surge driven by global demand for artificial intelligence infrastructure, yet the Korean won continues to trade close to its weakest levels in decades.

South Korea’s latest trade data confirms the strength of the current semiconductor cycle.

Exports reached a record US$87.8 billion in May, rising 53 per cent year-on-year and comfortably exceeding expectations.¹ 

Semiconductor exports increased by 169 per cent.¹ 

The benefits are increasingly extending beyond semiconductors, with non-semiconductor exports gaining momentum and manufacturing activity reaching its strongest level in more than five years. This has transformed Korea’s external accounts.

The current account surplus rose from 1.8 per cent of GDP in 2023 to 6.6 per cent in 2025 as semiconductor exports recovered sharply.¹ 

Semiconductor surge tipped to offset energy price drag

The Bank of Korea expects the semiconductor boom to more than offset the economic drag from higher energy prices stemming from tensions in the Middle East.

Under normal circumstances, such a combination of strong exports, rising corporate profitability and large external surpluses would be expected to support a stronger currency.

Instead, the won has continued to weaken. In our view, this reflects the dominance of capital flows over trade flows.

Korean investors have become substantial buyers of overseas assets, particularly US equities.

Domestic savings are increasingly being deployed overseas, while a growing share of the foreign currency revenues generated by Korean exporters are being retained offshore rather than repatriated and converted into won.

As a result, sizeable trade surpluses have coincided with persistent capital outflows.

Vast dollar earnings not being converted back to Korean won

The result is the emergence of “DRAM dollars”, analogous to the petrodollars generated by major energy exporters.

Korea’s semiconductor sector is generating vast dollar earnings, but an increasing share of those proceeds is not being converted back into won.

At the same time, strong performance in overseas equity markets and a weaker won have reinforced the attractiveness of foreign assets for domestic investors, creating a self-reinforcing cycle of capital outflows.

The won is cheap, but not outrageously so. In its 2025 External Sector Report, the International Monetary Fund (IMF) concluded that Korea’s external position in 2024 was broadly consistent with medium-term fundamentals and desirable policies.

In particular, the IMF noted Korea’s need to run a large current account surplus in order “to build precautionary savings to meet aging-related needs and an orderly deleveraging of private debt”.² 

Since that assessment, the real effective exchange rate has fallen by a further 8 per cent, while semiconductor exports and current account dynamics have strengthened.

How we are positioning

The portfolio remains substantially exposed to the beneficiaries of the AI investment cycle, including Samsung Electronics and SK Hynix, both directly and indirectly.

We remain heavily underweight the rest of the Korean market, where the transmission of semiconductor success into broader earnings growth is less certain.

We also remain underweight the won given the export exposure already embedded within our holdings.

Nevertheless, the combination of a large current account surplus, strong export momentum and increasingly attractive valuation suggests that the medium-term outlook for the Korean currency is becoming progressively more favourable.

Sources: ¹Bloomberg ²IMF

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Pendal Global Emerging Markets Opportunities Fund

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne, Ada Chan and Roshni Bolton are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
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