InterviewKosdaq 3,000 harder than KOSPI 5,000: Morgan Stanley

Morgan Stanley logo appears in this illustration taken December 2025. Reuters-Yonhap

Joon Seok, Morgan Stanley's Korea equity strategist and head of financials research / Courtesy of Morgan Stanley

HONG KONG — With the Korean government reaching its ambitious KOSPI 5,000 goal faster than expected, attention is shifting to the secondary Kosdaq market — a bourse aimed at nurturing innovative, tech-heavy companies, similar to the Nasdaq.

Since the announcement of the Kosdaq 3,000 initiative on Jan. 22, the index has continued to climb, reflecting strong investor enthusiasm. However, Morgan Stanley’s Korea equity strategist and head of financials research, Joon Seok, warned the target may be more difficult to achieve.

"The structure and dynamics of the Kosdaq market are quite different from those of the KOSPI," Seok said. "This is a more challenging target (than KOSPI) but taking the first step is key."

Seok noted that the Kosdaq’s growth-oriented nature leads to greater volatility, driven largely by the short-term trading behavior of retail investors, who account for 80 percent to 90 percent of total trading volume.

In addition, Kosdaq-listed firms tend to have weaker fundamentals and lower transparency than their KOSPI counterparts. The return on equity (ROE) — a key measure of profitability — remains a stark contrast. The KOSPI is projected to post a 17 percent ROE in 2026, versus just 12 percent for the Kosdaq.

Despite this, the Kosdaq trades at a valuation comparable to the Nasdaq, where companies have consistently delivered strong profitability, with ROEs around 20 percent in recent years.

"The key here is to have a lot more quality companies in Kosdaq, and fewer companies that dilute the overall quality of Kosdaq, as discussed on the policy side," Seok said. "There is also a need to improve transparency and access for foreign investors."

The Kosdaq rebounded strongly in 2025, gaining 36.5 percent. Still, that gain lagged the KOSPI’s 75.6 percent surge, according to the Korea Exchange.

The Kosdaq has long faced criticism for drifting from its original mission. Recurring controversies — including prolonged listings of financially distressed firms and allegations of price manipulation — have undermined its credibility. More recently, investor frustration has grown as several companies expanded on the Kosdaq only to seek transfers to the KOSPI.

To address these issues, the government is preparing a reform package to strengthen the secondary market. Measures include speeding up the delisting of troubled firms, promoting initial public offerings of core tech players and improving market transparency for minority shareholders.

The Financial Services Commission said Thursday that it will also tighten Kosdaq delisting criteria by raising the market cap threshold to 20 billion won ($13.85 million) this July and introducing a new rule for stocks priced below 1,000 won. Up to about 220 firms could be delisted this year, it said.

More room to grow?

Looking ahead, Seok said the KOSPI may still have further upside. He noted that Asia’s top-performing index is supported by significant ROE expansion — rising from around 8-9 percent over the past decade to 17 percent today.

On Jan. 25, Morgan Stanley raised its end-2026 KOSPI target from 4,500 to 5,200, leaning toward its bull case of 6,000, with a bear case at 4,200. Seok said Korea checks all the boxes for Morgan Stanley’s four key investment themes in 2026: artificial intelligence (AI) and tech diffusion, the future of energy, a multipolar world and societal shifts.

"There are only a few alternative markets where you can find quality companies that are well-positioned under those themes," Seok said. "There's a lot of momentum."

He added that investor confidence in chipmakers — which make up roughly 40 percent of the KOSPI market cap — remains strong. The capital-efficient nature of these firms, coupled with rising demand, is driving margins and boosting profitability.

The focus in the first half of 2026 is again expected to be on the technology sector, particularly chipmakers and industrials. Seok also expressed optimism about AI-adjacent sectors, such as energy and infrastructure equipment. He was similarly bullish on defense, financials and department store stocks.

While the semiconductor supercycle has helped propel the market to historic highs, Seok emphasized that the rally wouldn’t have been possible without the government’s push for structural reforms. He said continued execution by companies aligned with the reform agenda will be critical to sustaining momentum.

"We are at the stage where execution is more important — and sometimes, that’s the harder part," Seok said.