Excluding Samsung and SK Hynix, the Korean stock market's dynamic P/E ratio is 12! UBS: The valuation is very reasonable and is optimistic about Korean stocks.

Excluding Samsung and SK Hynix, the Korean stock market's dynamic P/E ratio is 12! UBS: The valuation is very reasonable and is optimistic about Korean stocks.

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The South Korean stock market has risen more than 80% this year, but UBS says this is not the end.

According to Wind Trading Desk, on May 21, the bank released its latest Korea stock strategy report, raising the KOSPI target price by 26% from its previous level to 9,200 points, and maintained a positive outlook. The bank believes that the breadth of corporate earnings growth far exceeds market expectations—not just Samsung and SK Hynix supporting the market. Excluding Samsung and SK Hynix, the KOSPI's forward PE is 12x, which is a reasonable valuation.

Up 78% this year, but even more affordable?

Year-to-date (in USD), KOSPI is up as much as 82%, making it the best performer among emerging markets and major global markets.

But something strange happened—the valuation actually fell despite such a big price rise.

The reason is that earnings growth outpaced stock price gains. Currently, the overall KOSPI forward PE (NTM PE) has dropped to 8x, mainly driven by Samsung Electronics (SEC) and SK Hynix (SKH)—the combined market value of these two companies has surged 141% year-to-date, but their PE is just 6x.

The problem is that institutional investors usually do not use PE to value cyclical semiconductor stocks, due to the strong cyclicality. The extreme valuations of these two companies severely distort the overall data.

So, analysts calculated a more meaningful figure: Excluding Samsung and SK Hynix, the KOSPI’s forward PE is 12x.

This figure is about 1.2 standard deviations above the historical average. Is it expensive? The bank's answer: reasonable.

The reason is that earnings growth in non-tech sectors is equally strong—expected to grow +68%/+18%/+15% in 2026/2027/2028, enough to support this valuation level.

Earnings growth of 258%, but it’s not just AI driving it

Analysts raised their EPS growth forecast for the KOSPI in 2026/2027/2028 to +258%/+46%/+9%, higher than the consensus forecast of +235%/+30%/+10%, also the highest among Asia Pacific emerging markets.

The +258% figure looks scary, but the logic behind it is clear: mainly explosive recovery of Samsung and SK Hynix's memory chip business driven by AI demand.

BUT analysts emphasize: the breadth of the earnings upward revision exceeded expectations.

Since the March 2026 US-Iran conflict erupted, 15 out of the 24 KOSPI sub-sectors saw upward earnings revisions, of which 8 sub-sectors rose over 10%. Upward-revised sectors include: batteries/chemicals/metals, shipbuilding, construction, holding companies, industry, diversified finance, steel/metals and consumer goods.

Downgraded sectors are mainly: utilities, transportation, internet, automotive and defense.

In other words, this is not a feast reserved only for tech stocks.

Foreign investors selling, retail buying—who will win?

Capital flows are one of the most noteworthy contradictions in this report.

Foreign capital: Year-to-date net outflow reached as high as $58 billion, the largest outflow among emerging markets. EM active funds have cut Korea to underweight. By sector, most foreign outflows came from tech stocks (net outflow about $52 billion), but UBS believes this is mainly due to position adjustment and single-stock weight restrictions, i.e. "passive reduction," rather than actively bearish.

A counterintuitive data point: Despite foreign investors selling, their holding ratio in KOSPI increased to 39.2%, up by 3 percentage points year-to-date. The reason is that the foreign sales focused on tech stocks, whose market cap rose even more, so the relative foreign holding ratios in other sectors increased.

Local capital: Retail investors net bought about $32 billion, local institutions net bought about $21 billion, basically offsetting the foreign outflows.

The latest Evidence Lab survey shows retail investors' willingness to increase direct investments in Korean stocks is at the highest level since the survey started in 2022.

Will foreign capital return? The bank believes that once the overall outflow trend in emerging markets reverses, or there is rotation from tech stocks to non-tech stocks, the probability of foreign investors re-entering is quite high—currently the underweight level of EM active funds on Korea is near historical lows.

Policy reform: shareholder returns improving

The report also specifically reviewed progress in Korean capital market reforms, which is another logic supporting valuations.

Key reforms implemented:

  • Mandatory cancellation of treasury shares (effective February 2026): Newly purchased treasury shares by listed companies must be cancelled within one year; existing treasury shares must be cancelled within 18 months
  • Director fiduciary duty extended to shareholders (effective July 2025)
  • Dividend tax reform (effective January 2026): For eligible high-value dividends, maximum tax rate reduced from 45% to 30%

Currently, Korean listed companies’ average treasury shares account for 4% of market cap, and some sectors (such as insurance, diversified finance) exceed 8–9%. The mandatory cancellation policy means this portion of treasury shares will gradually convert into substantial returns for shareholders.

In terms of dividend payout ratios, Korea is still at a low level among major Asia-Pacific markets (estimated at about 21% in 2026), far below Australia (66%), Singapore (65%), etc., so there is significant room for increase.

Target price 9,200; upside 10,500; downside 5,500

UBS’s scenario analysis:

  • Base target: 9,200 points (9x PE)
  • Optimistic scenario: 10,500 points (10x PE), reflecting an extended memory chip upcycle and sustained improvement in shareholder returns
  • Pessimistic scenario: 5,500 points (8x NTM PE), reflecting a shortened memory cycle and US-Iran conflict triggering stagflation pressures

Major risks include: changes in the AI bull market logic, market already pricing in memory cycle peak, rate hikes and energy shocks dragging earnings downward, rising labor costs squeezing margins, and sustained capital outflows from emerging markets.

For specific sectors and stocks, the bank maintains the following preferences: Bullish directions include memory chips, AI infrastructure, defense, shipbuilding, stocks benefiting from wealth effect; bearish directions include EV materials, semiconductor equipment.

 

 

 

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The above highlights are from Wind Trading Desk.

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