As the KOSPI index has soared to the 7,300 level and entered uncharted territory, concerns are being raised about a short-term correction. Because the prime driver lifting the KOSPI has been large-cap semiconductor stocks, valuations for non-semiconductor names are seen as burdensome.
Given that the sharp rally over the past two trading days was largely driven by a tilt toward large-cap semiconductor stocks such as Samsung Electronics and SK hynix and by net foreign buying, some advise closely watching economic conditions.
On the 6th, the KOSPI index closed up 6.45% at 7,384.56. However, only 202 stocks rose while 679 declined, more than triple, showing an abnormal market. In May, the KOSPI index surged 11.91% in just two trading days.
In the securities industry, analysts note that the KOSPI's 12-month forward price-earnings ratio (PER) remains around 7 times, and argue that despite a record high, Korea's stock market is still undervalued.
Lee Jae-won of Yuanta Securities Korea said, "The KOSPI's 12-month forward EPS is 996 points based on yesterday's close, and the 12-month forward PER is 7.18 times," adding, "Even after breaking through 7,000 points, the current valuation remains in deep-value territory, supporting the index on the downside."
However, since the main drivers of the KOSPI were large-cap semiconductor stocks, some point out that valuations for the rest of the sectors, excluding these names, are at a burdensome level.
Shinhan Investment & Securities projected 655 trillion won in expected net profit for the KOSPI this year. Of that, Samsung Electronics and SK hynix account for 458 trillion won. Excluding large-cap semiconductors, real profit is 197 trillion won, and just 122 trillion won after removing double counting (overlapping valuation due to multiple listings), the firm said.
In the end, with overall market earnings excessively dependent on semiconductors, concerns are growing that current share prices in non-semiconductor sectors without earnings power to back them are overvalued relative to fundamentals.
Lee Jeong-bin of Shinhan Investment & Securities said, "Excluding semiconductors, earnings size in the non-semiconductor space is limited," adding, "The non-semiconductor PER of 24.9 times is more expensive than the 19.6 times PER of the Standard & Poor's (S&P) 500 index excluding tech."
Lee added, "Prices have already priced in growth and improvement," and noted, "If earnings fail to catch up, it is highly likely to lead to valuation-adjustment pressure."
In addition, the recent sharp gains are seen as the result of foreign capital starting to return to the domestic stock market. While the KOSPI climbed from 4,000 to 6,000 points, foreigners maintained net selling, but that selling trend recently reversed, and foreigners turned to "buy."
According to the Korea Exchange's market data system, from Oct. 27 last year, when the KOSPI rose from 4,000 to 5,000 points, to Jan. 27, net foreign selling totaled 7.006 trillion won. From Jan. 28 to Feb. 25, when it surged from 5,000 to 6,000 points, net foreign selling was 14.96 trillion won. During March, when the U.S.-Iran war broke out, foreign net selling intensified further, reaching 35.881 trillion won.
This selling trend began to reverse last month. From the 1st to the 4th of last month, while individuals recorded net selling of 20.316 trillion won, foreigners turned to net buying of 4.074 trillion won. Even on this day, when the index topped 7,300 points, foreigners were net buyers of more than 3 trillion won.
However, given the tough economic environment, including rising prices and oil due to the impact of the Iran war, some warn to be cautious about short-term swings. In fact, the recent bond market has started to price in the possibility of additional benchmark rate hikes by the Federal Reserve (Fed). Bank of Korea Deputy Governor Yoo Sang-dae also hinted at a recent press briefing that "it is time to consider raising rates." As a result, concerns are spreading that global central banks' rate-hike timelines could accelerate, heightening market caution.
Lee Sang-heon, Director General of the iM Securities research center, said, "If the foreign buying that has been flowing into the domestic stock market diminishes and the share prices of Samsung Electronics and SK hynix, which have been leading the KOSPI, fall, the KOSPI index could also undergo a correction."