As the KOSPI index sets a record high day after day, some interpret the pullback of the KOSPI's 12-month forward price-earnings ratio (PER) back to around 10 times as a sign the market is nearing a time to sell. That is because industries with a strong cyclical profile, including semiconductors, have led the recent rally.
For cyclical stocks, a common strategy is to buy when the PER has risen and sell once the PER starts to fall. Typically, the market prices cyclical stocks based on long-term earnings rather than current earnings. As a result, valuation multiples are highest at the bottom of the cycle and lowest at the top of the cycle.
However, in the securities industry, some say attention should go beyond simple valuation gauges to upside risk—such as rising return on equity (ROE), a structural recovery in the semiconductor sector, and the government's incentives for the capital market.
The KOSPI's 12-month forward PER, which had been above 11 times, recently fell to around 10 times. This largely reflects earnings estimates for corporations being revised up quickly compared with three months ago. The annual net profit estimate rose from 242 trillion won three months ago to 321 trillion won now.
Yet even as the PER falls, the price-to-book ratio (PBR) is rising. This indicates ROE is improving structurally.
Lee Su-jeong, a researcher at Meritz Securities, said, "By traditional formulas, this is the time to sell Korean stocks," but added, "While ROE improvement is also affected by the capital reduction effect of share buybacks or dividends, the current ROE improvement stems from both earnings power and capital efficiency recovering at the same time, centered on the semiconductor sector."
The semiconductor sector is expected to account for 45% of the KOSPI's total net profit this year. That is similar to past semiconductor booms in 2013 (49%) and 2018 (46%). But experts said this cycle is different from the past.
In the past, events such as the end of the DRAM cycle or supply shocks cut short bullish market cycles, but now the three memory makers are known to have virtually sold out their production capacity for this year. It has become harder to see a short-term drop in contract prices that would signal the end of the cycle. Researcher Lee stressed it is "a phase with no reason to sell semiconductors."
The return of funds from individuals who invest in overseas stocks back to the domestic market could also be positive for domestic supply-demand. Starting this year, the government plans to introduce a repatriation investment account (RIA) program that temporarily reduces capital gains taxes if investors sell overseas stocks and make long-term investments in domestic stocks.
As of the end of the third quarter last year, overseas stock holdings totaled $161.1 billion (about 210 trillion won). If total repatriated funds come to around 10 trillion won, that could fully offset last year's 9 trillion won in net foreign selling.
Lee said, "If funds flow into large caps and index exchange-traded funds (ETFs), the perceived impact becomes even stronger," adding, "We focus on upside risk for large caps in the first quarter, including Samsung Electronics."