JPMorgan Sees Kospi at 8,500, Strategists Urge Buying ‘Itaewon’ Trades

Kospi up 52% this year, best performer among major markets

Chipmaker earnings fuel rally

Construction, energy and brokerages also show stronger profit momentum

Kospi PBR at 1.75 times still viewed as cheap

Industry says biggest bull market in Korean stock market history is opening

Battery, solar and nuclear stocks still worth buying

South Korea’s Kospi index shrugged off fears over the Middle East war and closed at a record high. Expectations for a second round of ceasefire talks between the US and Iran, along with forecasts for stronger earnings, boosted appetite for risk assets. Even after the rally, the index remains undervalued, trading at just 8.43 times earnings when the improvement in corporate profits is taken into account. Market participants say sectors beyond semiconductors, including construction, energy and securities firms, also merit further buying as earnings momentum strengthens.

◇Kospi Pushes Past War Fears

The Kospi rose 2.72% to close at 6,388.47 on April 21, according to the Korea Exchange. The finish topped the previous record close of 6,307.27 set on Feb. 26, before the Middle East war, setting a new all-time high.

The Kospi has climbed 51.59% this year. After gaining 75.6% last year, South Korea has ranked a clear No. 1 among 20 major countries for a second straight year. The advance has outpaced Taiwan’s Taiex, up 28.13%, Japan’s Nikkei 225, up 17.89%, and the S&P 500, up 3.85%. The market briefly lost momentum during the Middle East conflict, then rebounded as investor focus returned to earnings. Sentiment improved across the market after Samsung Electronics released its preliminary first-quarter results.

Lee Jae-won, an analyst at Yuanta Securities Korea, said external risks persisted, including Iran’s declaration that it would reimpose a blockade of the Strait of Hormuz. Still, investors have interpreted Tehran’s moves as a strategic step to gain the upper hand in negotiations, helping keep the index strong, he added.

The Kospi opened up 1.34% and gathered momentum in afternoon trading as foreign buying accelerated. Sector bellwethers including SK Hynix, up 4.97%, and LG Energy Solution, which jumped 11.42%, led the rally. Posco Holdings gained 8.22% on expectations that higher lithium prices will bolster earnings.

◇Strategists Turn to ‘Itaewon’ as Next Market Leaders

Analysts say the Kospi’s move above 6,000 does not look overvalued because earnings per share at locally listed companies are rising quickly. The index’s 12-month forward EPS has increased 27.41% since the start of the year, far outpacing growth of 3.71% in the US and 2.83% in Europe. Corporate profits are climbing rapidly, yet the Kospi trades at 8.43 times earnings, less than half the 21.81 times for the US market. It is also cheaper than Japan at 17.81 times and China at 14.80 times. Investors say that discount to developed markets leaves ample room for further gains.

Government measures to support the stock market and prospects for inclusion in the MSCI developed-markets index have also buoyed sentiment. Goldman Sachs recently raised its 12-month target for the Kospi to 8,000 from 7,000.

Timothy Moe, Goldman Sachs’s Asia-Pacific strategist, said sectors outside semiconductors are also poised to deliver solid earnings growth of about 48%. With the Kospi’s average PER at about 10 times when it reached previous peaks, there is room for further valuation expansion, he said. JPMorgan has set a target of 8,500, while Nomura Securities has raised its outlook to 8,000.

Some strategists say investors can still add positions ahead of earnings season. Lee Sun-yup, chief executive officer of AFW Partners, said the biggest bull market in the history of South Korea’s stock market is opening. He urged investors to keep buying earnings-recovery plays centered on “Itaewon” — shorthand for secondary batteries, solar power and nuclear energy.

Jo Ara, Hankyung.com reporter rrang123@hankyung.com