Kospi PER Halves From Long-Term Average, but Brokerages Warn Against Bargain Hunting

The Kospi’s price-to-earnings ratio has fallen to about half its long-term average, but that should not be taken as an immediate sign the market is undervalued, according to an analysis. The market has marked down valuations because earnings estimates remain high even as share prices have fallen sharply, raising doubts about how sustainable those profits will be.

FnGuide, a South Korean financial data provider, said on Oct. 2 that the combined consensus for third-quarter operating profit at Kospi-listed companies stood at 270.8894 trillion won ($196.3 billion). That was up 230.97% from a year earlier. The estimate has in fact been revised up 0.16% over the past three months.

Over the same period, however, the Kospi fell 19.33%. With earnings forecasts holding firm while stock prices tumbled, the index’s 12-month forward PER dropped to 5.38 times from 7.69 times. That is about half the 10-year average of 10.25 times.

Brokerages say the lower PER alone is not enough to conclude valuations have become attractive. Noh Dong-gil, an analyst at Shinhan Securities, said the current low PER is difficult to interpret as a straightforward sign of undervaluation.

A sharp jump in earnings estimates for large-cap semiconductor stocks has been a key variable. That has significantly boosted earnings per share, the denominator in the PER calculation. Using the same yardstick as in the past to compare PER could create the illusion that the market is cheaper than it actually is.

The market’s central question now is how long those earnings can be sustained and what valuation investors are willing to assign to them, Noh said. Valuations can recover only if investors gain confidence that current elevated profits will last.

How earnings estimates move after results are announced has also had a major effect on share performance. Shinhan Securities analyzed 1,274 earnings announcements by 98 large-cap companies from the first quarter of 2023 through the second quarter of this year. It found that whether forward EPS estimates were revised higher after the results mattered more for returns than the earnings surprise itself.

Companies that posted operating profit more than 5% above consensus and then saw their 12-month forward EPS revised up by more than 2% over the following four weeks generated excess returns of 3.33 percentage points versus the market. By contrast, stocks whose EPS revisions stayed within plus or minus 2% delivered virtually no excess return. Those whose estimates were cut by more than 2% underperformed the market by 2.73 percentage points.

That suggests fourth-quarter investment strategy should focus less on short-term earnings and more on changes in next year’s profit estimates. After reviewing third-quarter earnings in October, investors should consider rebalancing portfolios in November based on shifts in next year’s earnings outlook, Noh added.

Semiconductors were identified as the sector with the clearest earnings visibility for next year. DRAM bit demand growth in 2027 is projected at 25.1%, above supply growth of 24.6%, suggesting supply shortages could persist. The market is forecast to shift into oversupply in 2028.

Outside semiconductors, shipbuilding and power equipment ranked high on the list. Existing order backlogs are likely to convert into sales and profit next year. In shipbuilding, the key variables are margin expansion from the recognition of sales from higher-priced vessels and improved costs rather than new orders. For power equipment makers, the pace of capacity expansion and profitability improvement will determine future share-price performance.

Cosmetics was presented as the next candidate for broader earnings growth. Cosmetics exports in July and August rose 44.3% from a year earlier. The key is to identify companies where that export growth will feed through into higher sales and profits next year.

Ultimately, the key issue for the stock market in the fourth quarter is not the lower PER itself but the direction of next year’s earnings outlook. Rather than chasing sectors that have already risen sharply, investors should focus on stocks seeing fresh upward revisions to earnings estimates.