If Middle East conflict risk cools, KOSPI could recover from 5000 support toward the 6000 scenario

Overview

This report reviews the state of the South Korean market after the shock from the Middle East conflict. Morgan Stanley believes that Korea is hit harder in risk-off phases, but also typically rebounds more strongly in risk-on phases. Recently, KOSPI rose 8.44% in a single day, led by IT and Industrials, with defense leading the gains. The report judges that the Middle East situation may be cooling, but it still needs confirmation on how much of the Strait of Hormuz has reopened, how long oil and logistics costs will stay elevated, and how KRW weakness will affect corporate earnings.

Core views

The core view is that KOSPI has held its 5000 bear-case support, and if geopolitical risks continue to ease, the index could move toward 6000; however, oil prices, commodity prices, logistics costs, and exchange-rate pressure will weigh on some earnings, so the near-term recovery will not happen overnight. On allocation, the report remains constructive on defense, energy security, and overseas EPC as themes that benefit from geopolitical risk, while recommending a renewed look at chip stocks, viewing the recent tech pullback as more of a mid-cycle correction. Relatively less favored areas include domestic consumer, utilities, and transport; consumer staples are downgraded to equal-weight.

Analysis framework

The report combines macro scenario analysis, sector rotation, earnings revisions, and fund flows: it first determines whether the Middle East conflict is shifting from escalation to cooling, then evaluates how oil prices, logistics costs, and KRW weakness transmit into Korean corporate earnings; it then compares KOSPI sector performance and foreign versus domestic fund flows, and adjusts sector priorities accordingly.

Methodology notes

• Macro scenario analysisGeopolitical conflict cooling scenario

  Uses the Middle East situation and the degree of reopening of the Strait of Hormuz as prerequisites for a recovery in risk appetite.

  If the conflict cools, the South Korean market could shift from risk-off pressure to risk-on rebound; if a prolonged effective blockade scenario emerges, 5000 support and policy responses would need to be reassessed.

• Sector allocationRisk appetite rotation

  In risk-off phases, defensive, defense, and energy security names perform well; in risk-on phases, growth stocks are more likely to outperform.

  The report recommends retaining beneficiary sectors such as defense, energy security, and overseas EPC, while reallocating into chips and other growth themes as risk appetite improves.

• Earnings revisionConsensus earnings downgrade risk

  Oil prices, commodity prices, logistics costs, and KRW weakness may pull down KOSPI earnings expectations.

  The report highlights that domestic consumer, utilities, and transport are more adversely affected, while exporters with pricing power and positive sensitivity to a weaker KRW are relatively more resilient.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• KOSPI

  Core market index

  Strengths

  Strong rebound leverage when risk appetite recovers; 5000 is viewed as strong support; policy support may cushion the shock.

  Weaknesses

  Highly sensitive to oil prices, KRW, and foreign risk appetite, with a pronounced decline during the conflict period.

  Comparison

  The report says South Korea was the worst-performing market in Asia after the Gulf conflict broke out, but it also rebounds more strongly in risk-on periods.

  Risks

  A renewed escalation in the Middle East conflict, prolonged disruption in the Strait of Hormuz, and earnings downgrades larger than expected.

• South Korean Industrials

  Top overweight theme

  Strengths

  Defense, energy security, and overseas EPC benefit from geopolitical dynamics and order expectations.

  Weaknesses

  Some of the gains already reflect expectations of faster MENA deliveries and new orders.

  Comparison

  The report puts Industrials ahead of IT as the top overweight sector.

  Risks

  A rapid easing of geopolitical risk could trigger a crowded-theme pullback, or order realization could fall short of expectations.

• South Korean chip stocks

  Growth allocation in a risk-appetite recovery

  Strengths

  Analyst Shawn Kim views the recent move as a mid-cycle correction and favors DRAM, HDD, and NAND.

  Weaknesses

  Consensus operating profit revisions in IT have recently flattened, and 1Q26 results and guidance are needed for confirmation.

  Comparison

  Industrials are ranked ahead of IT, but the report still recommends re-engaging with chipmakers.

  Risks

  Samsung Electronics' 1Q26 results or guidance could disappoint, and technology earnings revisions could continue to slow.

• Consumer staples

  Downgraded to equal-weight

  Strengths

  Defensive characteristics may provide some stability during volatile periods.

  Weaknesses

  Inflation pressure and weak consumer sentiment are unfavorable for domestic consumer names.

  Comparison

  Priority has fallen relative to Industrials, energy security, and chips.

  Risks

  Domestic consumption weakens further and cost pressures cannot be passed through.

• Exporters and weak-KRW beneficiaries

  Relatively resilient theme

  Strengths

  Exporters with pricing power and positive sensitivity to a weaker KRW are less impacted, including chips, defense, power generation, overseas EPC, and auto OEMs.

  Weaknesses

  If external demand weakens or cost increases exceed the currency benefit, earnings may still come under pressure.

  Comparison

  Compared with domestic consumer, utilities, and transport, exporters face less fundamental pressure.

  Risks

  KRW volatility, slowing global demand, and commodity costs staying high.

Key data

• KOSPI daily performance+8.44%The report says KOSPI rebounded 8.44% yesterday, led by IT and Industrials, with defense leading.
• KOSPI conflict-period performance-19.1%From March 2 to March 31, South Korea was the worst-performing market in Asia after the Gulf conflict broke out.
• KOSPI support level5000Morgan Stanley continues to view 5000 as strong support unless a more prolonged effective blockade scenario emerges.
• KOSPI recovery scenario6000If Middle East tensions cool, the report expects KOSPI to move toward 6000.
• South Korea supplementary budgetW26.2tnThe supplementary budget has been submitted to the National Assembly, and media reports suggest approval is expected on April 10, focusing on support for SMEs and small businesses.
• KOSPI YTD performance in 202619.9%The chart shows KOSPI up 19.9% YTD in 2026.
• IT YTD performance in 202631.8%The chart shows the IT sector up 31.8% YTD in 2026, with index weight of about 51%.

Impact & implications

The investment implication is that South Korean equities still have relatively high beta: when risk appetite recovers, KOSPI and growth stocks may rebound more strongly; but earnings downgrades, oil prices, and FX pressure will limit the speed of recovery. At the portfolio level, the report leans toward gradually adding back chips and growth sectors while retaining defense, energy security, and overseas EPC as beneficiary themes, and reducing reliance on domestic consumer, defensive high-dividend names, and consumer staples.

Risks

• The Middle East situation does not truly cool, or the Strait of Hormuz reopens less than expected.
• Oil prices, commodity prices, and logistics costs remain above pre-conflict levels for an extended period.
• KRW weakness persists and erodes corporate profit margins.
• Consensus KOSPI earnings are downgraded, especially in domestic consumer, utilities, and transport.
• 1Q26 earnings and chipmaker guidance miss expectations.
• Defense and energy security trades become overly crowded, leading to a pullback if risk appetite shifts quickly.
• Uncertainty around the South Korean election and policy priorities makes the pace of capital-market and governance reforms hard to judge.

What to watch

• How much of the Strait of Hormuz reopens and whether Middle East tensions continue to cool.
• How long oil prices, commodity prices, and logistics costs stay elevated.
• Whether KRW weakness persists and the differentiated impact on exporters versus domestic-demand companies.
• Samsung Electronics' 1Q26 earnings next week and chipmaker guidance.
• The direction of KOSPI consensus earnings revisions, especially for IT, domestic consumer, utilities, and transport.
• The approval and implementation details of South Korea's W26.2tn supplementary budget around April 10.
• Fund flows from foreign investors, domestic retail investors, institutions, and pension funds into IT, Industrials, and other sectors.