Fund Managers Cut Kospi Targets, See 7,764 Ceiling and Watch US Midterm Elections

South Korean fund managers have sharply lowered their outlook for the Kospi. Even so, most viewed the recent pullback as a process of shaking off short-term overheating and seeking a rebound, rather than the start of a full-blown bear market.

A survey conducted by the Korea Economic Daily on September 25 of 53 fund managers at 12 domestic asset management firms found the average upper end of Kospi forecasts for the next three months at 7,764. That was 1,866 points lower than the 9,630 projected in the previous survey in June. The average lower end also fell, to 6,051 from 7,478 over the same period.

Despite the lower index targets, respondents remained relatively upbeat on the market's direction. About 71.7% said recent stock-market moves reflected a search for a rebound after a short-term overheating correction. Another 20.8% expected an extended range-bound market, while just 1.9% saw the market entering a full-fledged downturn.

For the fourth quarter, 66.0% forecast a pattern of weakness early on followed by a recovery later in the period. That suggests fund managers expect investor sentiment to improve toward year-end even if volatility continues.

Views on market leadership also shifted. Asked to identify the most promising sectors and themes for the next three months, 79.2% chose artificial intelligence, the highest response rate. Semiconductors followed at 73.6%. Given that 95.2% picked semiconductors in June, expectations for the sector's dominance have weakened somewhat.

The most-cited cause of the recent market correction was concern over a semiconductor peak-out, at 62.3%. That was followed by heavier concentration of leverage in individual stocks at 41.5%, higher oil prices and interest rates stemming from Middle East risks at 34.0%, and margin calls and deleveraging by overseas hedge funds at 32.1%.

The factor seen as having the biggest impact on the stock market over the next three months was the US midterm elections. Some 52.8% named the outcome of the elections as a key variable, followed by the durability of the AI and semiconductor cycle at 49.1%. Additional Federal Reserve rate hikes came in at 41.5%, rising bond yields at 37.7%, and commodity prices and inflation at 34.0%.

Expectations for corporate earnings remained high. Some 98.1% of respondents projected that operating profit at domestically listed companies would rise in the third quarter from a year earlier. Another 81.1% said corporate investment would increase over the next 12 months.

With index expectations lowered, the US midterm elections, interest rates and the semiconductor cycle are set to be the key variables shaping the stock market's direction in the fourth quarter.