Goldman Sachs has drastically cut its 12-month target for South Korea’s Kospi index to 9,000 from 12,000, citing heightened market volatility and slowing earnings momentum. Despite this significant reduction, the firm maintains an “overweight” rating on Korean equities, projecting over 60% upside due to perceived undervaluation.
The downgrade reflects broader market pressures on Asian technology stocks, influenced by concerns over AI spending, rising oil prices, and hawkish central bank policies, leading to substantial foreign investor outflows from South Korea and Taiwan.
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Goldman Sachs has significantly revised its 12-month outlook for South Korea's benchmark Kospi index, slashing its target to 9,000 from the previous 12,000. This sharp adjustment comes as the financial giant points to escalating market volatility and a noticeable deceleration in corporate earnings momentum.
Despite this substantial downgrade, Goldman Sachs is maintaining an "overweight" stance on Korean equities. Strategists, led by Timothy Moe, highlighted in a Sunday report that even with the reduced target, it still signifies a potential upside of more than 60% from current trading levels, suggesting a deep undervaluation in the market.
The Kospi index has experienced a significant downturn, plummeting 40% from its peak highs. Its current price-to-earnings (P/E) ratio hovers around four times, a valuation approximately three standard deviations below its historical average. This indicates that Korean equities appear excessively discounted when compared to their underlying fundamentals, even factoring in the prevailing market instability and slowing profit growth.
Particular concern is directed at South Korea's pivotal memory chip sector, where current valuations implicitly forecast an approximate 65% decline in 2027 earnings. This reflects investor apprehensions regarding the long-term sustainability of profitability within this key industry.
However, Goldman Sachs also identifies promising avenues beyond memory chips. The bank estimates that non-memory stocks, which constitute roughly half of the Kospi index, remain more than 30% undervalued. Investment opportunities are seen in sectors such as power, industrials, companies benefiting from corporate governance reforms, industries poised for reflation, the burgeoning K-culture segment, and various risk reversal strategies.
This downgrade by Goldman Sachs is set against a broader backdrop of a sell-off in Asian technology stocks. Contributing factors include uncertainties surrounding the longevity of AI spending, an uptick in global oil prices, and the increasingly hawkish policies adopted by central banks worldwide. The bank further noted persistent foreign investor outflows, particularly from hedge funds, with South Korea alone registering $1 billion in foreign capital divestment from its equities.
