On the First Day of the Yoon Administration, KOSPI Reverts to Five Years Ago... Center Director's Urgent Analysis: "No Benefit in Selling"

Despite Corporate Profit Improvement, KOSPI Moves Independently "Severe Ultra-Low Valuation"
'Korea Discount' Issue Highlighted Even on New Government Inauguration Day
Plunged to 2500 "Decline Limited"... Selling Pressure Restrained, Focus on Defensive Stocks

[Asia Economy Reporters Seon-ae Lee, Jae-hee Kwon, Min-ji Lee, Myung-hwan Lee] The Yoon Suk-yeol administration took its first step on the 10th amid the specter of the "Korea Discount" (undervaluation of the Korean stock market). The previous day, the KOSPI closed at its lowest level in 17 months, highlighting severe undervaluation and bringing the "Korea Discount" issue to the forefront as a challenge for the new government era. On the day of inauguration, the KOSPI further plunged, falling to the 2,500 level. The KOSDAQ also widened its early losses to over 3%, sliding to the low 800s. Currently, the domestic stock market has regressed to levels seen five years ago, reflecting an extremely undervalued valuation. It is about half the average of developed countries and even below the average of emerging markets. The market is permeated with fear. Securities firm center heads emphasized that although the lower band of the KOSPI is open to 2,500, there is no practical benefit in selling at the current state.

Lost Trust in Powell: "KOSPI Has Downside Rigidity"

Over the past month, the earnings adjustment ratios for listed companies in Q1, Q2, and this year have increased by 5.93%, 2.65%, and 7.86%, respectively, indicating earnings improvement. The operating profit forecast for KOSPI 200 this year currently stands at 236.4 trillion KRW. The problem is that the price-to-earnings ratio (PER) of the KOSPI has dropped to about 9.66 times. Until the beginning of the year, the PER fluctuated around the five-year average of approximately 10.5 times, but due to the recent pronounced price decline, it has fallen below the five-year average. This is lower than both the developed and emerging market averages. PER compares a company's net income to its current stock price level, and a lower figure indicates undervaluation.

The issue is the high possibility of further valuation declines and the pervasive fear in the market. Lee Seung-woo, Head of Research at Eugene Investment & Securities, said, "The U.S. stock market plunge reflects concerns about inflation and recession, and notably, the VIX index, a fear gauge, reached 35," adding, "Market fear has increased, and while efforts to curb inflation by dampening consumer sentiment will proceed, it will not be easy."

Lee Kyung-soo, Head of Research at Meritz Securities, also stated, "Although the Federal Open Market Committee (FOMC) in May expressed that a soft landing of the economy is possible, the market's skepticism has increased," emphasizing, "The KOSPI downside is open to 2,500." The 2,500 level corresponds to the KOSPI earnings level of 140 trillion KRW in 2018. Current KOSPI earnings are expected to be around 170 to 180 trillion KRW, indicating extreme undervaluation.

Yoon Ji-ho, Head of Research at eBest Investment & Securities, also noted, "Market trust in Fed Chair Jerome Powell has declined, and the domestic market is fearful," setting the KOSPI downside at 2,570. However, he emphasized that since major domestic stocks have already entered the bottom zone, the index's decline will be limited.

Kim Hak-gyun, Head of Research at Shin Young Securities, said, "The U.S. stock market plunged due to perceptions that the Fed will struggle to control inflation, and the domestic market cannot be free from this," but added, "However, there is no inherent bubble in the domestic market, and since external uncertainties are spreading, downside rigidity is secured."

Yoon Chang-yong, Head of Research at Shinhan Financial Investment, also assessed that the KOSPI downside is open to 2,550. He said, "The stock market inflection point is delayed for the same reasons as in the U.S.," emphasizing, "Even if volatility expands further, the domestic market's decline will be relatively resilient."

Rebound Possible Only in the Second Half: "No Practical Benefit in Selling Now"

The general view is that the domestic stock market's sluggish trend will only be overcome in the second half of the year.

Lee Seung-hoon, Head of Research at IBK Investment & Securities, said, "It is necessary to check whether the U.S. and China’s April inflation data, to be released on the 11th, fall below expectations," adding, "Risks related to the Fed may persist until the June FOMC, the economic slowdown may intensify in the second half, and the U.S. midterm elections in November will act as continuous downward pressure on the stock market."

Yoon Seok-mo, Head of Research at Samsung Securities, said, "The domestic and international economic conditions hampered by inflation, prolonged risks from the Russia war, China's economic downturn and reckless lockdowns, and the additional 50 basis point rate hikes expected at the June and July FOMCs create external uncertainties with no positive factors to counter them," diagnosing, "Foreign selling and increased volatility in the domestic market are inevitable."

As an investment strategy, it was emphasized that there is no practical benefit in selling, so there is no need to join panic selling. Yoon Ji-ho said, "There is no need to join panic selling out of fear, and for new investors, now is rather an opportunity," adding, "The domestic stock market is expected to stabilize when inflation calms down, and the index will be higher in the fall than now."

Lee Kyung-soo also stressed that there is no practical benefit in selling. He said, "Since downside support is expected, selling is not beneficial; rather than aggressive buying at the 2,500 level, it is recommended to wait for a rebound trigger or approach with staggered buying." He added, "The trigger for a rebound will take some time, as it depends on the resolution of earnings and inflation pressures currently weighing on the market," diagnosing, "The next quarter or so will involve a process of confirming global inflation trends and domestic corporate earnings." Kim Hak-gyun also recommended from a risk management perspective that selling now is not beneficial if one already holds stocks.

Lee Seung-woo advised focusing on stocks with lowered valuations rather than growth stocks. He said, "It is better to approach profitable companies rather than absurd growth stocks," advising, "Attention should be paid to sectors such as machinery, shipbuilding, IT hardware, and semiconductors, where the PER has dropped more than 20% compared to the beginning of the year."

Yoon Seok-mo of Samsung Securities urged confidence in the solid earnings of domestic companies. He said, "Considering a market correction down to KOSPI 2,500, I recommend taking advantage of low-price buying of recession-resistant stocks (hedges against economic slowdown and inflation pressure: semiconductors, IT hardware, automobiles, refining, defense, telecommunications) targeting after the fourth quarter."

Yoon Chang-yong said, "It is necessary to gradually increase stock exposure below a PER of 10 times, but since it is still difficult to be confident in index betting, sector selection remains important," recommending, "Approach mainly with inflation hedges and defensive stocks, and seek opportunities in the automobile and IT value chains."

Jang Hwa-tak, Head of Research at DB Financial Investment, who set the KOSPI downside at 2,550, said, "Considering that valuations are at bottom levels, some buying can be considered, focusing on automobiles, retail, banks, and steel," adding, "When the perception that inflation has peaked emerges, dominant concerns will ease, and stock prices will rebound." Lee Seung-hoon advised, "A conservative portfolio construction strategy is necessary," recommending, "Focus on responding with mega-cap blue chips such as Samsung Electronics and Hyundai Motor, and defensive sectors like utilities and telecommunications."

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