Wall Street Eyes Korean Stocks: KOSPI's Price-to-Earnings Ratio Hits 20-Year Low, Goldman Sachs Maintains 12,000 Point Target for Buying on Dips

On July 19, amid a global semiconductor sell-off and momentum reversal, South Korea's KOSPI index has fallen nearly 25% since its peak on June 22, with an additional drop of 8.8% this week alone. As of July 16, the 12-month forward price-to-earnings (P/E) ratio has fallen to 5.78 times, below the lows seen during the 2008 global financial crisis, marking the lowest level since 2004.

In its weekly report on July 17, Goldman Sachs pointed out through stress testing that even if earnings per share (EPS) were to be adjusted down by 41% (the worst level during the financial crisis), the KOSPI would still correspond to a level of about 8,965 points based on a valuation of 13 times at the EPS trough in 2008, significantly higher than the current level. This indicates that the current valuation presents a positive skew risk-return characteristic. In terms of price-to-book ratio, the forward price-to-book ratio has dropped to 1.43 times, while the forward return on equity (ROE) remains at a high level of about 25%, a rare divergence.

Excluding Samsung Electronics and SK Hynix, the overall forward P/E ratio of the KOSPI stands at 8.79 times, still below the historical average. There has been a marginal shift in foreign capital flows: this week, foreign investors turned to net buying of about 19 billion won, primarily flowing into the automotive and retail sectors, while the technology sector still faced net selling of about 76.6 billion won; the Korean won appreciated by 1.2% against the dollar this week. However, Goldman Sachs' Korean stock risk barometer reading is -2.7, indicating it remains in a deep risk-averse zone.

On the regulatory front, the South Korean government has introduced a series of new regulations for single-stock leveraged ETFs: starting August 5, the cash margin will be raised from about 3 million won to 30 million won, and from August 19, alternative collateral will be prohibited, new product listings will be suspended, and existing product marketing will be immediately banned. The minimum trading unit is proposed to be raised from 1 unit to 20 units in November. It is believed that the requirement for a full cash margin of 30 million won will significantly compress retail participation, but the market has already completed part of the deleveraging in advance— the total scale of single-stock leveraged ETFs has decreased from a peak of about 24 trillion won on June 25 to about 17 trillion won.

Although the balance of margin financing has decreased from a peak of 38 trillion won to 33 trillion won, the deposit balance of South Korean investors has risen to 110 trillion won, and the ratio of financing balance to deposits has significantly declined, indicating limited systemic risk in overall leverage. Strategically, Goldman Sachs maintains a target price of 12,000 points and recommends buying on dips, while UBS maintains a target price of 9,200 points and shifts to a barbell strategy, adding defensive allocations in consumption, healthcare, and construction, while removing cyclical and growth sectors that have seen significant prior gains. Both institutions agree that Korean stock valuations are at historically extreme low levels, but they have different approaches to short-term volatility and uncertainties in AI demand.

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