[MarketING] High Valuation Burden and Profit-Taking

KOSPI Falls Below 2460... KOSDAQ Drops Under 780
High Valuation Pressure Limits Index Gains
Growing Desire for Profit-Taking Also Weighs Down

[Asia Economy Reporter Song Hwajeong] The KOSPI started lower for the second consecutive day, falling below the 2460 level. The increased valuation burden, combined with profit-taking desires from institutions and foreigners, is acting as a factor limiting the index's rise.

KOSPI Declines for Two Consecutive Days Due to Increased Valuation Burden

As of 10:20 a.m. on the 10th, the KOSPI was at 2456.29, down 25.23 points (1.02%) from the previous day. The KOSDAQ fell 11.8 points (1.5%) to 772.78.

The sustained rise since January has increased the valuation burden, which appears to be restricting the index's upward movement. The KOSPI's 12-month forward price-to-earnings ratio (PER) is approaching 13 times. PER is calculated by dividing the current stock price by earnings per share, and the 12-month forward PER is calculated using the current stock price and future earnings forecasts (consensus). Lee Kyungmin, a researcher at Daishin Securities, explained, "The KOSPI 12-month forward PER has exceeded 12.5 times since the end of January, surpassing the highest level since May 2021, which corresponds to a valuation level similar to the 3200-3300 range of the KOSPI index," adding, "This is a result of a rebound driven by expectations despite weakening fundamental momentum."

Lee Euntaek, a researcher at KB Securities, said, "Attention should be paid to the KOSPI 12-month forward PER of 13 times, as the only meaningful breakthrough of this level occurred in 2021," adding, "Therefore, valuation pressure may appear above this level."

The U.S. stock market is also experiencing increased valuation pressure. Kim Seokhwan, a researcher at Mirae Asset Securities, stated, "The current 12-month forward PER of the S&P 500 index is 18.6 times, exceeding the previous 5-year average of 18.5 times and the 10-year average of 17.2 times," adding, "Considering it was 16.5 times at the beginning of the year, the recent price rise has increased valuation pressure, likely expanding the desire for profit-taking."

Valuation pressure is expected to be alleviated through upward revisions in earnings forecasts in the future. Lee explained, "The PER burden during the current weak market finishing phase was resolved as the 12-month forward earnings per share (EPS) rebounded," adding, "Once the EPS rebound gains momentum, the PER burden is relieved, and a rally resumes." He further added, "After one or two EPS downward revisions in February, a rebound is likely to be confirmed in the second quarter."

Jung Inji, a researcher at Yuanta Securities, said, "The KOSPI 12-month forward PER is at 12.8 times, close to a historical high, so there is price pressure, but this will be resolved over time," adding, "From April, as the first quarter is removed from earnings forecasts and the first quarter of next year is included, the PER will naturally decrease, and if earnings forecasts increase, it could decrease further."

Diverging Market Participants Amid Growing Profit-Taking Desire

As valuation pressure increases, the desire for profit-taking is also growing. Recently, institutions have continuously sold for profit-taking, and foreigners' buying momentum is weakening.

Institutions, which sold only 109.7 billion KRW last month, have sold 1.8342 trillion KRW so far this month. Foreigners still show a net buying preference but with gradually weakening intensity. On the other hand, individuals, who sold 6.2315 trillion KRW in the KOSPI market last month, have only sold 21.6 billion KRW this month.

Choi Yujun, a researcher at Shinhan Investment Corp., analyzed, "Since the gap-up on the 25th of last month, individual investors' participation in the stock market has increased, causing buying funds to rebound recently, and customer deposits, which are waiting funds for buying, have bottomed out," adding, "Considering the rapid rebound since the beginning of the year and the current valuation pressure, individual participation is likely to increase during the price correction phase."

There is also an opinion that foreigners have additional buying capacity. Lee Jaeman, a researcher at Hana Securities, said, "China's reopening and Europe's economic recovery are raising expectations that the export and earnings cycle has passed its bottom," adding, "Expectations for China's domestic economic recovery could eventually lead to yuan appreciation against the dollar, which would also lead to won appreciation, indicating that foreigners have additional net buying capacity."