Despite a 33% Drop From the Peak... Three Opportunities and Three Risks Coexist in the KOSPI [Click e Market]

KOSPI down 33% from June peak
12-month forward EPS upgraded for 12 consecutive months
Next key factors: foreign capital flows and semiconductor sector confidence

On the 10th, the KOSPI and KOSDAQ indices are displayed on the status board of Hana Bank dealing room in Jung-gu, Seoul. Photo by Yonhap News

Although the KOSPI has been highly volatile, some analysts in the securities industry believe that there are still signs of a potential rebound. Share prices have dropped to crisis levels, but corporate profit forecasts are actually rising, and the upward pressure on U.S. interest rates is easing. However, because foreign investor flows and market sentiment have not fully recovered yet, they diagnose that the path of any rebound may be closer to the shape of a 'square root (√)' rather than a sharp 'V.'

On the 11th, Hana Securities stated in a report, "From August onward, we expect the KOSPI to see a '√-shaped' rebound," adding, "The anxiety is not over, but the rebound has begun."

The core issue lies in the divergence between price and earnings. The KOSPI has fallen by 33.3% from its June peak. In contrast, the 12-month forward earnings per share (EPS) estimate has risen by approximately 184% since the beginning of the year and has been revised upward for 12 consecutive months.

This also sets the current situation apart from past crises. During earlier crises such as the 1998 Asian financial crisis, the 2008 global financial crisis, or the COVID-19 shock of 2020, profit expectations deteriorated along with falling share prices. Now, things are different: profit forecasts are rising even as share prices fall. As of August 9, the KOSPI's 12-month forward price-to-earnings ratio (PER) is 5.12 times. This is lower than the 6.27 times seen during the 2008 financial crisis and the 7.53 times during the COVID-19 bottom. In other words, prices are reflecting crisis-level risks, but earnings don't suggest a crisis yet.

Exports also support the improved earnings outlook. In July, exports reached 98.89 billion dollars, a 62.8% increase compared to a year earlier. Semiconductor exports totaled 41.01 billion dollars, up 178.8%. In the second quarter, GDP grew 0.6% quarter-on-quarter and 3.7% year-on-year.

Of course, risks remain. The biggest variable is foreign investor flows. In July, net selling by foreigners was concentrated in major semiconductor stocks such as Samsung Electronics and SK hynix. In the first week of this month, foreign investors were net sellers of about 7.4 trillion won in the KOSPI. This is why it is difficult to say that concerns and portfolio rebalancing around semiconductors have fully subsided.

Interest rates, on the other hand, are moving in a favorable direction. Nonfarm payrolls in the United States for July were significantly below expectations, and the market reacted by seeing less chance of further Federal Reserve rate hikes ahead of potential recession concerns. The probability of a rate hike in September has dropped to 44.4%, and the yield on U.S. 10-year Treasurys has fallen to around 4.6%. The weaker dollar is also favorable for the won.

Distortions in investor flows are also passing their peak. The KOSPI trading share of single-stock leveraged exchange-traded funds (ETFs) using Samsung Electronics and SK hynix as underlying assets plunged from 32.5% on July 30 to 3.4% on August 7. As regulatory measures—such as raising the minimum deposit amount and the suspension of new ETF listings—take effect, mechanical volatility may decrease. However, investor sentiment, hurt by losses, will recover more slowly than flows themselves.

Hana Securities diagnoses that three risks and three opportunities coexist in the market this August. Flow remains weak, volatility is high, and investor sentiment is negative. On the other hand, prices are low, earnings are solid, and the direction of interest rates is turning favorable. Hana Securities researcher Kim Dooun explained, "The initial rebound will be shaped by price and interest rates, and the subsequent rise will be led by earnings and foreign investors," adding, "Although the sense of fear has not ended, the rebound has already begun."

Hana Securities also proposed imposing a transaction tax of about 0.2% only on sales of single-stock leveraged and inverse ETFs. They stressed that this is not intended to regulate all ETFs, but that the sunset provision should be structured to reevaluate its effects after a certain period, aiming for market stability. The aim is to return the volatility cost, currently being imposed on the broader spot market by ultra-short-term trades and mechanical rebalancing, back inside these particular products. Kim further emphasized, "Policies do not need to push up prices," and, "It is sufficient to clear distorted flows so that corporate earnings can once again determine prices."

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