[MarketING] Steep Rise, Growing Valuation Pressure

KOSPI Valuation at Highest Level Since Second Half of Last Year
Key to Easing Valuation Pressure is 'Earnings'

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] As the KOSPI continues its early-year rally, valuation concerns are also increasing. Amid ongoing downward revisions of earnings, the KOSPI's 12-month forward price-to-earnings ratio (PER) has risen sharply to its highest level since the second half of last year.

KOSPI Rises for 9 Consecutive Days, Valuation Levels Increase

As of 10:05 a.m. on the 16th, the KOSPI was at 2,398.40, up 12.31 points (0.52%) from the previous day, marking the ninth consecutive day of gains. The KOSDAQ rose 5.24 points (0.74%) to 717.06.

As the KOSPI continues its early-year rally, concerns about valuation burdens are growing. According to Daishin Securities, the KOSPI's 12-month forward PER rose to 11.74 times. This surpasses the highest level since the second half of last year and the November peak of 11.62 times. Lee Kyungmin, a researcher at Daishin Securities, explained, "In terms of the KOSPI index, it has reached a valuation level similar to the 3,200?3,300 range," adding, "This means the rebound is based on expectations such as interest rate cuts and industry improvement rather than the economy or earnings, indicating that valuation pressure is intensifying."

Laboratory Gil, a researcher at Shinhan Investment Corp., also noted, "The 12-month forward PERs for the S&P 500 and KOSPI are 17.5 times and 11.7 times, respectively, meaning the KOSPI faces greater valuation pressure than the S&P 500," and analyzed, "Since the start of monetary tightening in early 2022, the KOSPI PER is approaching its highest level."

The key to alleviating valuation pressure is earnings. Researcher Noh said, "The only variable that can relieve valuation pressure is the recovery of earnings estimates for KOSPI companies," adding, "If the KOSPI's 12-month forward earnings find a bottom within one to two months, the current PER increase can be viewed as reasonable."

Earnings Expectations Continue to Decline

In a situation where corporate earnings are crucial to reducing valuation pressure, companies are currently announcing their fourth-quarter results and revising earnings forecasts downward. As earnings expectations continue to decline, it is difficult to expect relief from valuation pressure. Researcher Lee pointed out, "The possibility of a dramatic earnings turnaround driving the KOSPI's rise is low," adding, "Rather, earnings forecasts are likely to be further downgraded, which would increase valuation pressure, restrain stock price gains, weaken expectations, and increase volatility due to economic and earnings uncertainties."

Both Samsung Electronics and LG Electronics, which have already disclosed their earnings, recorded earnings shocks, but due to expectations of industry improvement and passing the earnings bottom, their stock prices rebounded, pushing the semiconductor sector's 12-month forward PER above 22 times. Due to weak semiconductor earnings, not only the fourth-quarter operating profit forecasts but also the first-quarter and annual operating profit forecasts for this year are being significantly revised downward. The fourth-quarter operating profit forecast was lowered by 19.7% compared to the previous month, and the first-quarter forecast dropped by 19.6%. The annual operating profit forecast for this year is also down 7% from the previous month and 13.3% compared to three months ago.

The first-quarter earnings forecast for this year is likely to decline further. Researcher Noh said, "As of January, we are entering the period before the full-scale announcement of fourth-quarter results, and since the fourth-quarter earnings estimates are falling short of expectations, the first-quarter earnings estimates are also likely to be revised downward," adding, "We must consider that indicators will worsen due to China's reopening of economic activities, and that the downward revision of first-quarter earnings estimates this year has been slower than in the past. The earnings revision ratio has not yet bottomed out."