South Korea's stock market has climbed steeply while setting a string of record highs, yet its valuation has fallen to an all-time low.
According to Bloomberg on the 11th, the KOSPI (005930.KS) has risen about 80% this year to set record highs, but its 12-month forward price-to-earnings (P/E) ratio has fallen to 6.4 times. That is even lower than the level seen during the 2008 global financial crisis.
The valuation decline stems from corporate earnings improving far faster than expected. The backdrop was a surge in memory chip prices last year, as global big tech companies moved to build out AI infrastructure. Earnings estimates for KOSPI-listed companies have been revised upward for 17 consecutive months, the longest such streak in more than nine years, Bloomberg reported. The KOSPI's P/E is only about one-third that of Taiwan's TAIEX index.
"If you are underweight these stocks, this is a good entry point to add growth linked to the AI theme to your portfolio," said Francis Tan, chief Asia strategist at Indosuez Wealth Management in Singapore. "Earnings are solid and are expected to remain strong going forward."
Bloomberg also presented the view that the KOSPI's low P/E reflects concerns among many investors. It noted that the Korean market has not moved far beyond the situation in which it was undervalued enough to be called the "Korea discount," owing to corporate governance issues and a cyclical earnings structure led by Samsung Electronics (005930.KS) and SK hynix (000660.KS).
"The Korean market needs clear evidence that the memory supercycle will continue," said Charu Chanana, chief analyst at Saxo Markets. "Being cheap alone is not a reason to buy."
She added, "Hyperscalers will significantly increase AI investment again this quarter, but at the same time they may begin to mention cost optimization. This is negative for the memory market, because it could mean high prices are killing demand."
Still, short-term earnings outlooks are improving. The KOSPI's 12-month forward earnings-per-share (EPS) estimate has risen about 170% this year, the largest annual increase since the statistics began in 2006. Memory price gains are also expected to continue for about another year.
Even so, concerns have been raised that profitability could deteriorate as in the past if demand slows. SK hynix's U.S. listing is expected to serve as a catalyst for narrowing the valuation gap with its U.S. rival Micron, but the strengthening competitiveness of China's ChangXin Memory Technologies (CXMT) is cited as a risk factor.
Given the unusual boom in the memory market, some argue that metrics other than P/E are more useful for measuring valuation. For example, the KOSPI's price-to-book (P/B) ratio has topped 2 times for the first time this year. Because P/B is calculated on the basis of net assets, it is less volatile and represents actual fundamental strength centered on asset value even amid economic fluctuations.
On this point, Keith Bortoluzzi of Impactful Partners in Singapore said, "Based on the PEG ratio, which divides P/E by earnings growth, Samsung Electronics and SK hynix are no longer very cheap stocks." He forecast, "The share prices may hold at current levels for about the next six months, but rising much further from here will not be easy."
