[Inside Chodong] The World’s Cheapest KOSPI... Will It Finally Break the "Curse of Cyclicality"?

Korea's Stock Market Is the Most Undervalued in the World
Possibility of Prolonged Memory Semiconductor Boom
Hopes That Semiconductors Will Break KOSPI's Chronic Undervaluation

Changhwan Lee, Deputy General Manager of Securities and Capital Markets Department

One of the most frequently cited characteristics of the Korean stock market is its “chronic undervaluation.” Among major global markets, there is arguably no other that is valued as conservatively as Korea’s.

While the KOSPI is closing in on 6,000, its 12-month forward price-to-earnings ratio (PER) remains stuck in the mid-7s. By comparison, the United States stands at 20, Japan at 17, Europe at 14, and even China at 11. The global average is around 17, meaning Korea’s figure is less than half the world average.

Why is the Korean stock market uniquely undervalued? The cyclical nature of Korea’s industries is often cited as the main reason. Key sectors such as semiconductors, automobiles, shipbuilding, and steel are highly sensitive to changes in the global economy, leading to significant earnings volatility.

Take semiconductors, which have recently been the driving force behind the Korean market. Booms and busts alternate every few years, making long-term investment seem risky. Although share prices have risen sharply, many investors are hesitant to assign higher valuations, fearing sudden downturns. For this reason, even after Samsung Electronics announced first-quarter operating profits that rank among the world’s top five, its forward PER still hovers around 5 to 6. SK hynix, for its part, sits at approximately 4. When compared to global big tech companies like Apple (about 32), TSMC (34), or Nvidia (about 36), Korean chipmakers look extremely cheap.

Amid this persistent undervaluation, there are increasing claims that “this time is different.” At the center of this optimism is the memory semiconductor, now an essential component for artificial intelligence (AI). Unlike the past, when memory chipmakers focused on short-term, quarterly contracts, there are growing reports that they are now actively pursuing long-term agreements (LTAs) with customers, lasting at least three to five years.

Thanks to AI, the memory semiconductor supercycle is now expected to last at least two more years. As a result, major customers such as Google, Microsoft, and Apple are reportedly rushing to sign long-term contracts with Samsung Electronics and SK hynix. If LTAs become the norm, memory semiconductors could evolve from a cyclical business into a stable industry with guaranteed long-term earnings. This expectation is fueling hopes that Korean companies will finally be valued appropriately, like non-memory semiconductor leaders TSMC or Nvidia. Moreover, other historically cyclical sectors—such as shipbuilding and power equipment—are also seen as entering a period of prolonged prosperity fueled by long-term contracts.

Of course, skepticism persists. Above all, investors worry that global big tech’s investment in AI could slow down. Should signs of declining investment emerge, semiconductor demand could fall, leading to a plunge in stock prices. There are also concerns over financial risks stemming from big tech’s excessive capital expenditures, as well as the rapid catch-up of Chinese semiconductor firms. On the supply-demand side, persistent profit-taking by foreign and institutional investors remains a pressure point. These are all hurdles the Korean market must overcome in order to be re-rated.

The legendary investor John Templeton once described “This time, it’s different” as the four most expensive words in investing. His words continue to resonate decades later, as markets always move in cycles of boom and bust. Yet there have been many instances when the conventional wisdom has been upended—such as when the KOSPI broke through the seemingly impossible 6,000 mark. This time, I hope the Korean market will finally break the curse of cyclicality and embark on a long-term upward trajectory.

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