KOSPI's Undervaluation Appeal Diminished... Spotlight on Healthcare for Sector Rotation

Korea Investment & Securities stated that although the recent rise of the KOSPI above the 3,100 level has largely diluted its undervaluation appeal, attention should be paid to the healthcare sector from a rotational perspective.

On June 27, Yeom Dongchan, a researcher at Korea Investment & Securities, said in a report titled "Time to Look for Rotational Opportunities," "The KOSPI at 3,100 corresponds to a 12-month forward price-to-earnings ratio (PER) of 10.5 times. While this is not high enough to be considered overvalued, the undervaluation appeal has been diluted."

Yeom pointed out, "There are many hurdles to overcome, such as the issue of overlapping profit reflections, low return on equity (ROE), low growth rates, and low dividend payout ratios. In addition, ahead of Samsung Electronics' earnings announcement scheduled for early July, it is important not to overlook the downward revisions of second-quarter earnings estimates."

Regarding foreign investor flows, he commented, "Although foreigners turned to net buying in May and June, the cumulative net purchases amount to only 8 trillion won. In the past, the foreign ownership ratio bottomed out around 30%, and although it fell to 30.7%, it still stands at 31.9%. This means there is ample room for additional foreign capital inflows."

Yeom continued, "Given that the stock market has shown strength without a clear period of correction, we should keep in mind the possibility of a slowdown in upward momentum. However, I believe there is still room for additional foreign buying, and the possibility of sector rotation exists."

He added, "Even during the June rally, we need to look for sectors where valuations have not expanded significantly and where foreign buying could flow in. The healthcare sector stands out as foreign ownership remains low, the foreign ownership ratio has not increased during the rally since April, and there has been no expansion in valuations."

He further noted, "Although a disadvantage of the healthcare sector is that its PER level is higher than other sectors, considering that it has been left out of the rally, it could serve as an alternative sector when the KOSPI level feels burdensome."

Meanwhile, after breaking through the 3,100 level, the KOSPI closed at 3,079.56 on the previous day, down 0.92% from the previous session, due to factors such as profit-taking.