Samsung Securities raised its forecast for the KOSPI's upper bound this year to 12,600 points from 11,000. It said the improvement in corporations' earnings is likely to continue in the second half. It set the KOSPI's lower bound at 8,400 points.
Yang Il-woo, an analyst at Samsung Securities, said, "The profit momentum that briefly slowed in June is likely to revive from the third quarter," and noted, "Even if semiconductor prices do not rise much from late in the second quarter, the current third-quarter operating-profit consensus for the semiconductor sector is fully achievable."
Reflecting this earnings improvement, Samsung Securities raised its forecast for corporations' sustainable return on equity (ROE) to 17% from 16.1%. Accordingly, it also lifted the appropriate price-to-book ratio (PBR) applied to the KOSPI to 3 times from 2.75 times and presented the upper end of the target index at 12,600 points.
Yang said, "A PBR of 3 times is high compared with the past, but Korea's 12-month forward ROE is actually higher than that of the S&P 500," adding, "Given that the United States' S&P 500 and Taiwan Capitalization Weighted Stock Index (TAIEX), which have lower ROE, trade at PBRs of 4.7 times and 4.3 times, respectively, this is a readily attainable valuation."
By contrast, it presented the KOSPI's lower bound at 8,400 points. He said, "In the past 20 years, there has been no case where the KOSPI traded for more than three weeks at a 12-month forward price-earnings ratio (PER) of 8 times or lower," adding, "Unless corporations' earnings forecasts are sharply revised down, a PER of 8 times will be a meaningful support level."
He added, "At the current KOSPI PBR of 2 times, the assumption embedded is a 13.2% level for the next 12 months' expected ROE," and analyzed, "This effectively presumes that domestic corporations' profitability will fall below that of Europe's stock markets, where IT has almost no weight. If global economic conditions do not deteriorate significantly, the likelihood that the KOSPI's ROE will drop below 13% is not high."
He cautioned, however, that attention is needed regarding rising market volatility. Yang said, "Since mid-April, the KOSPI's daily return swing has been about four times larger than the S&P 500's," adding, "Given that this elevated volatility could persist into the second half, there is a need to respond sensitively to global macroeconomic variables."
He drew a line against concerns that the large-scale investments and fundraising by U.S. big tech corporations could burden financial markets. He said, "The net profit margin outlook for S&P 500 corporations is 16.1%, an all-time high, and the net-debt ratio of nonfinancial corporations is instead on a downward trend," adding, "Given that high-yield bond spreads are also stable, it is hard to say big tech's fundraising is worsening funding conditions for other corporations."