Goldman Sachs cut its 12-month target for South Korea's KOSPI to 9,000 from the 12,000 it set four months ago, a 25% reduction.
Goldman Sachs strategists said in a report on the 25th that they had applied more conservative assumptions to corporate valuations after the KOSPI fell more than 35% from its peak in June this year, Bloomberg reported.
The bank said, however, that the Korean market remains undervalued. The strategists said the market is pricing in an overly negative outlook for fundamentals and that the recent plunge has left Korean stocks deeply undervalued. They added that while they lowered the target index to reflect more conservative assumptions about how the market assesses corporate fundamentals, Korean equities remain attractive on a risk-reward basis. The reduced target of 9,000 still implies upside of more than 60% from the current level of 5,550.
The KOSPI's forward price-to-earnings ratio (P/E) has fallen to about 4 times. The forward P/E measures share prices against expected earnings over the next 12 months. Bloomberg said that was the lowest P/E among 18 major global stock markets since 2006. Bloomberg said the Korean market, the hottest among major global exchanges this year, has become the world's cheapest after the plunge.
Goldman Sachs also said valuations in the semiconductor sector are excessively pessimistic. Current share prices reflect expectations that earnings will fall 65% next year, the bank said. Stocks outside the memory chip sector account for about half of the KOSPI, and their forward P/E stands at just 7.6 times. Even as it lowered its target, Goldman Sachs maintained a positive view on power and industrial stocks, companies tied to corporate governance reform, and firms set to benefit from a recovery in domestic demand and the global spread of Korean pop culture.