Goldman Sachs cuts KOSPI target to 9000 points: Why does it still see upside of more than sixty percent?
South Korean stocks fell while earnings expectations were revised up slightly. Goldman Sachs considers both memory and non-memory stocks undervalued, but has adopted more conservative valuation assumptions; persistent outflows and doubts about earnings sustainability remain key constraints on a recovery.
Original source：Goldman SachsFirst published on Unhidea：Original source date：
Key takeaway
Goldman Sachs believes South Korean stock prices already reflect an excessively pessimistic earnings outlook. Its 9000-point target still implies upside of more than sixty percent, but that assessment depends on a recovery in the relationship between profitability and valuations, while fund flows remain weak.
Why remain bullish after cutting the target?
Goldman Sachs lowered its KOSPI target for the next 12 months from 12000 to 9000 points, citing a more conservative assumption about the valuation the market is willing to assign to fundamentals. Compared with the index level of approximately 5550 points on 23 October, the new target still implies upside of more than sixty percent.
The scale of this pullback far exceeds the latest change in earnings expectations: the KOSPI has fallen approximately 40% from its previous peak, giving back half the gains from the preceding bull market. The index fell another approximately 2% over the past week, while expected earnings per share for the next 12 months were revised up slightly by 0.1%. Goldman Sachs therefore believes prices are reflecting an excessively pessimistic outlook for fundamentals.
How much of an earnings slowdown have memory stocks priced in?
Memory stocks were at the center of the decline. Goldman Sachs attributes it to investor concerns about earnings sustainability, with retail investors reducing risk further amplifying the fall. As of 22 October, the South Korean semiconductor index traded at just 2.8 times forward earnings for the next 12 months, its lowest historical level.
Goldman Sachs did not rely solely on a low price-to-earnings ratio to judge stocks cheap; it compared return on equity with price-to-book value. The current historical price-to-book ratio of 2.6 times corresponds, based on the historical relationship, to an ROE of approximately 23% over the next 12 months, well below the market consensus of 45%. Applying 45% to the same relationship implies a price-to-book ratio of approximately 5.4 times.
The key to this calculation is how much earnings can be retained. In Goldman Sachs’ scenario table, an 80% downward revision to earnings over the next 12 months versus the current forecast produces an estimated total return of negative 27%; a 70% downward revision produces a positive 6%. The calculation also incorporates growth in book value and assumes dividends adjust proportionately with earnings. The protection afforded by low valuations changes significantly with the size of earnings downgrades.
Does the undervaluation case depend solely on memory stocks?
Goldman Sachs also considers South Korean stocks undervalued after excluding Samsung Electronics and SK Hynix: based on the relationship between forward ROE and historical price-to-book value, the valuation discount exceeds 30%. Its recovery thesis therefore covers the market beyond memory stocks and does not depend entirely on the earnings of the two heavyweight companies.
Even if the index rises to 9000 points, Goldman Sachs’ price-to-book and ROE relationship implies a discount of more than 20% to the model valuation. This and the statement that there is currently more than sixty percent upside to the target use two different baselines: the former compares the target level with the model valuation, while the latter compares the target level with the current index.
There is also a basis for retaining a discount. Goldman Sachs’ historical regression shows that for each 1 percentage-point increase in South Korea’s equity risk premium, the price-to-book ratio typically contracts by approximately 9%. Even if earnings remain high, investors’ demand for greater risk compensation would constrain valuation recovery.
Have fund flows begun to support the recovery?
Fund flows remain weak. Corporate buybacks have recently been the only significant source of inflows, while all major investor groups have been net sellers; foreign outflows since the start of the year have been driven mainly by selling in Samsung Electronics and SK Hynix. As of 23 October, foreign ownership of the semiconductor sector had fallen to 48.3%, approximately 2.4 standard deviations below its historical average.
Low positioning also depends on the comparison window: GS Prime Services data show that net allocation to South Korea has fallen to 3.5%, at the 31 percentile over the past year but still at the 86 percentile over the past five years. The recent reduction in positions has been pronounced, yet allocation remains relatively high over the longer period.
Preliminary EPFR data covering approximately 55% of assets show that Asian active funds increased their South Korea exposure over the past month and three months, but remain underweight overall. Goldman Sachs’ South Korean equity risk barometer stands at -1.1, still in risk-off territory; the current bullish case comes mainly from valuations, while funds are still leaving.
