'New KOSPI Listing' Fundamentals Are Strong... But Beware of a Drop to 2350 if Stagflation Hits

[Asia Economy Reporter Lee Seon-ae] Despite expectations for the new government, the KOSPI has struggled to gain momentum. Although it saw a brief rise the previous day, it reverted to a downward trend due to external negative factors such as disappointment over Ukraine-Russia negotiations and inflationary pressures. The 12-month forward price-to-book ratio (PBR) of the KOSPI has fallen to the 1.0 level, maintaining a low trend, and there are forecasts that if stagflation concerns become a reality, the PBR could fall below 1.0.

According to the Korea Exchange on the 11th, over the past decade, the KOSPI's 12-month forward PBR fell below 1.0 on four occasions. In 2013 and 2014, the periods below 1.0 were relatively short. In 2013, the cause was the financial market tantrum triggered by fears of tapering (asset purchase reduction) by the U.S. Federal Reserve (Fed). In 2014, the decline was influenced by reduced corporate earnings and earnings slowdown in KOSPI companies. From 2015 to the first half of 2017, and from 2018 to the second half of 2020, the KOSPI PBR remained below 1.0 for extended periods due to complex concerns including Fed interest rate hikes. Most recently, the U.S.-China trade dispute and the COVID-19 shock had an impact. During the COVID-19 shock, the KOSPI fell to around 1400 in April 2020 but recovered to a PBR of 1.0 by November 2020 due to liquidity effects from major central banks.

Recently, various factors continue to drive the KOSPI downward. In particular, the prolonged full-scale war scenario between Russia and Ukraine is a negative factor. Kim Jung-won, a researcher at Hyundai Motor Securities, stated, "If the Russia-Ukraine full-scale war prolongs, rapid commodity price increases could materialize inflation and stagflation concerns." He added, "The KOSPI valuation reflecting stagflation concerns over the past 10 years is judged to be the 2019 average 12-month forward PBR of 0.88. Applying this to the current 12-month forward book value per share (BPS) of around 2680 suggests a downside level of about 2358."

Despite the change in administration and the new government's capital market pledges, the securities industry expects the stock market's honeymoon effect to be limited due to numerous external variables. The current lower bound of the March KOSPI forecast band is 2500. Estimates from Shinhan Financial Investment (2500?2780), Daishin Securities (2500?2750), and KB Securities (2550?2840) mostly consider the possibility of breaking below 2600.

However, there is no movement yet to further adjust the lower bound of the band. The view that the 2500 level is the bottom and that breaking below it is difficult provides some relief. Han Ji-young, a researcher at Kiwoom Securities, emphasized, "Currently, the domestic stock market is under downward pressure due to renewed inflation uncertainty and caution over the prolonged Ukraine situation, but since it has entered an oversold area, selling responses should be avoided."

It is also believed that the strengthening of the Korean stock market's resilience will be a driving force to overcome external negative factors. Since last year, 22 companies, including LG Energy Solution, have been newly listed on the KOSPI 200 as of this day. The combined market capitalization of these 22 companies is 240.3 trillion KRW, accounting for about 12% of the KOSPI's total market capitalization. Despite the KOSPI closing 8.7% lower when comparing January 2 last year and the closing on the 8th of this month, the market capitalization actually increased by 4.7% due to large-scale new listings. Moreover, the average 12-month forward PBR of these 22 newly listed companies is 4.7, indicating that most are fundamentally sound growth stocks, which also strengthens the market's resilience.

Researcher Kim said, "Compared to before COVID-19, the fundamentals and basic strength of the KOSPI market have improved significantly, so the KOSPI PBR is unlikely to fall as low as in 2019." The most vulnerable period for the Korean economy and KOSPI fundamentals in the past decade was 2019. At that time, Korea's real economic growth rate fell to 2.2% due to trade disputes and other factors, marking the lowest level in the past decade excluding the special COVID-19 situation. Additionally, domestic companies' net profit (controlling shareholders) in 2019 plunged 45.3% compared to 2018, amounting to only 71.2 trillion KRW. He emphasized, "This year, the real growth rate is expected to exceed 3.0%, and operating profit is forecasted to increase by 6% compared to last year to 254 trillion KRW, so the market strength this year is different from that in 2019."

This content was produced with the assistance of AI translation services.