Goldman Sachs cuts KOSPI target to 9000: Why does it still expect Korean equities to re-rate?

Why is there still more than 60% upside after a 25% target cut?

Goldman Sachs cut its KOSPI target for the next 12 months from 12000 to 9000, a reduction of 25%; relative to roughly 5550 on 23 October, it still implies more than 60% upside. The revision reflects more conservative valuation assumptions: the market may continue to discount fundamentals.
The KOSPI has fallen 40% from its previous high, giving back roughly half the gains from the previous bull market. Goldman Sachs notes that corporate profits are at record levels, yet the index’s forward price-to-earnings ratio for the next 12 months has fallen to about 4 times, roughly 3 standard deviations below its historical average. The gap between prices and earnings underpins its bullish view.
That divergence continued this week: the KOSPI fell 2.1%, while expected earnings per share for the next 12 months edged up 0.1%. Risk aversion toward global AI-related stocks ahead of key earnings reports also continued to weigh on Korean equities.

A lack of confidence in the sustainability of earnings in the heavily weighted memory industry is one of the main drivers of the decline, with retail investors reducing risk and amplifying the sell-off. As of 22 October, the forward price-to-earnings ratio for Korea’s semiconductor memory sector was just 2.8 times, at a historical low.
Goldman Sachs uses the historical relationship between return on equity and price-to-book value to gauge this pessimism: the current rolling price-to-book ratio of about 2.6 times implies ROE of roughly 23% over the next 12 months, well below the market consensus of 45%; pricing in the consensus ROE of 45% would imply a price-to-book ratio of about 5.4 times under the model.
The key to this calculation is how much future earnings can be retained and whether the historical valuation relationship will remain applicable. That relationship explains approximately 72% of historical changes in price-to-book ratios; the current discount reflects investors’ doubts about whether high earnings can be sustained.

Goldman Sachs also examined Korean equities excluding Samsung Electronics and SK Hynix. Based on the historical relationship between forward ROE and rolling price-to-book ratios, this part of the market is undervalued by more than 30%, so its bullish view is not solely a bet on the two memory giants.
Even if the index reaches 9000, Goldman Sachs believes its price-to-book ratio would still be at a discount of more than 20% relative to its relationship with ROE. This means the target itself retains a valuation discount and does not require the market to return fully to the level indicated by the model.

Fund flows remain a source of pressure. Corporate buybacks have recently been the only meaningful source of net inflows, while all other major investor groups have been net sellers; foreign outflows during the year have been concentrated mainly in the two largest memory stocks. As of 23 October, foreign ownership of the semiconductor sector had fallen to 48.3%, 2.4 standard deviations below its average since 2000.
Active funds have not shifted across the board either: preliminary EPFR data as of September show that, although Asian funds increased their exposure to Korea over the past one to three months, they remain underweight relative to their benchmarks; the data cover approximately 55% of assets.
Goldman Sachs’ Korean equity risk indicator remains in risk-off territory. According to its historical analysis, for every 1 percentage point increase in the equity risk premium, the price-to-book ratio typically falls by about 9%; persistent risk aversion can continue to depress valuations, which is also why strong earnings and weak share prices can coexist.