KOSPI enters undervalued zone despite recent 18% plunge

The KOSPI has entered an undervalued zone with a 12-month forward P/E ratio of approximately 4x, following a monthly decline of 17–18%. However, economist Park Hyeong-jung warned that a market bottom cannot be confirmed until profit outlooks for semiconductor companies stabilize and interest rate pressures subside.

The recent sharp decline in the KOSPI index has deepened investor concerns, raising questions about whether the drop represents a buying opportunity or a signal to shift assets into bonds. Park Hyeong-jung, an economist at Woori Bank, analyzed the recent KOSPI correction not as a result of corporate earnings issues, but as a shift in the valuation standards for future profits.

Why the KOSPI fell more than Taiwan despite similar industrial structures

This month, the KOSPI plummeted by approximately 17–18%. In contrast, the Taiwan stock market, which shares a similar industrial structure with South Korea, saw a decline of around 2% during the same period, showing a distinct difference in returns. Park identified three key factors driving this divergence: exchange rates, industrial structure, and interest rates.

First is the impact of exchange rates. While the KRW/USD exchange rate fell rapidly from the 1,500 won range to the low 1,300 won range, signaling a strengthening won, the Taiwan dollar recorded a slight weakness against the US dollar. A stronger won likely had a negative impact on the won-denominated revenue and profits of Korean semiconductor companies. Conversely, Taiwan enjoyed a favorable environment for export profits due to its weakness against the dollar.

The difference in industrial structure was also decisive. While Taiwan's representative company, TSMC, is a foundry business, South Korea's Samsung Electronics and SK hynix have a high concentration of memory semiconductors. Memory semiconductor profits are highly volatile depending on industry conditions. When expectations for demand and pricing begin to decline, stock prices tend to react much more sensitively to memory industry trends, amplifying the downward movement.

Interest rates are another major cause of the stock decline. As the high-interest rate trend persists, with the US 10-year Treasury yield exceeding 5%, the discount rate applied when converting a company's future profits into present value has risen. This factor lowers the appropriate value of stocks. In particular, because the Korean market saw significant stock price increases in the first half of the year, investors held high proportions of stocks, leading to a larger correction as selling pressure emerged all at once.

KOSPI P/E at 4x level: Is it time to buy?

The KOSPI's current 12-month forward price-to-earnings (P/E) ratio is approximately 4x. This is historically very low, clearly indicating an undervalued zone that may appear to be a buying opportunity. However, Park advised against rushing into the market based solely on a low P/E ratio.

This is because, for memory semiconductor companies, the extreme volatility of profits can create an illusion where the P/E ratio appears low precisely when the industry conditions are at their peak. Therefore, Park presented three conditions that investors considering entering the KOSPI must verify.

First is whether the profit outlook for semiconductor companies is being maintained or upwardly revised. If profit forecasts are lowered, the undervalued P/E ratio becomes meaningless, and the correction could lengthen. Second is to confirm whether upward pressure on interest rates is subsiding. If the rising trend in interest rates does not stop, stock price volatility may continue. Finally, from a supply and demand perspective, investors should observe whether foreign selling pressure decreases and whether "downward rigidity" appears, where stock prices no longer fall when bad news occurs.

"At present, it is difficult to say that these three conditions have been sufficiently confirmed," Park analyzed. "While the stock price level itself may be attractive, it is too early to judge that the market bottom has been confirmed, and one should remain open to the possibility of further declines."

AI growth remains valid, but timing is key for bond investment

Regarding the future trend of the stock market, Park diagnosed that while a recovery of the short-term upward trend will not be easy, it is not an entry into a long-term bear market. This is because companies are not failing to earn money; rather, investment sentiment has been dampened by doubts regarding the profitability of AI investment and high interest rates.

Doubts regarding the long-term growth potential of AI changing the world remain low, and semiconductor demand is expected to continue accordingly. However, it is an environment where it is difficult to naturally expect the high returns seen in the past. In this situation, increasing interest in bonds is a natural trend.

However, caution is also required for bond investment. While the interest income from bonds is attractive due to high rates, if interest rates rise further, bond prices may fall, preventing investors from achieving expected profits. Specifically, he explained that a strategy to maximize returns by increasing duration should be considered at a time when inflationary pressures ease and the rise in market interest rates stabilizes.

Source: original video (YouTube)