UBS lowers KOSPI target again from '8000 → 7500'... “Burden of strong won”

Second adjustment this year... “Temporary readjustment, not a decline in performance”

(Seoul = Yonhap News) Reporter Jeong Hoe-in = Global investment bank (IB) UBS lowered KOSPI's 12-month target from 8,000 to 7,500, reflecting concerns about worsening corporate performance due to the strong won.

However, he predicted that there will be a gradual recovery next year, saying that investors' risk aversion has reached an extreme level due to the recent plunge in the stock market.

According to the financial investment industry on the 29th, UBS presented KOSPI's 12-month target at 7,500, 6.3% lower than the previous level, in the Korean market strategy report released on the same day.

This is equivalent to applying a 12-month forward price-to-earnings ratio (PER) of 6 times.

This is the second time this year that UBS has lowered its KOSPI target. Previously, last September, the target was lowered from 8,800 to 8,000 due to rising interest rates, the strength of the won, and rising international oil prices.

UBS cited the possibility of a decrease in companies' earnings per share (EPS) due to the strengthening of the won as the main reason for lowering the target.

The value of the won has risen by about 15% since last June, and if other conditions remain the same, the EPS of KOSPI-listed companies could decline by about 2% and 10% this year and next year, respectively.

In particular, it was pointed out that the market's downward revision to the EPS forecast this month was only 0.5%, so the impact of the strong won was not sufficiently reflected in the company's performance outlook.

If the value of the Korean Won rises, the sales and profits of exporting companies may decrease in the process of converting profits earned in dollars into Korean Won.

By industry, performance forecasts for chemicals, entertainment, defense, automobiles, consumer goods, internet, and cosmetics were revised down by a relatively large amount, while performance forecasts for energy, transportation, construction, and insurance industries were revised upward.

However, UBS assessed that the recent downward revision of companies' performance forecasts is closer to a readjustment due to exchange rate changes rather than the beginning of a full-scale performance deterioration phase.

The EPS growth rates of KOSPI-listed companies this year and next year are expected to be 258% and 33%, respectively. This is lower than the market forecast of 278% and 38%.

It is expected that foreign selling, which has led to the recent decline in the domestic stock market, will gradually ease.

UBS evaluated that “the large-scale net selling by foreigners this month was partly received by companies’ share purchases and by individual and domestic institutional investors, and the fact that foreigners switched to net buying this week is positive.”

In addition, KOSPI's 12-month forward PER, excluding Samsung Electronics [005930] and SK Hynix [000660], was 6.6 times, below the historical average, indicating that the burden of valuation (corporate value) had also decreased.

UBS cited concerns about the sustainability of artificial intelligence (AI) investment spending as a major risk factor, but predicted that the stock market will gradually recover next year, driven by corporate profit growth, improved shareholder returns, and easing liquidity constraints.

The target value for the KOSPI rise scenario was presented at 9,300.