Brokerage houses are shifting their views on South Korean stocks after the KOSPI spent more than a month trading in a narrow range without clear direction. Reports cutting target prices, which flooded the market after last month's selloff, have thinned noticeably, and upgrades have again overtaken downgrades. Improving corporate earnings forecasts and easing market volatility are fueling expectations that the KOSPI will reclaim the 7,000 level next month.
Brokerages issued 355 reports raising target prices this month against 562 lowering them, according to FnGuide data released on the 28th. Downgrades still dominate for the month as a whole, but the picture changes over a shorter window. Over the past week, from the 22nd to the 28th, upgrades numbered 47 against 42 downgrades, reversing the trend. The steep cuts to price targets that persisted since last month appear to be settling down.
The downgrade wave stood out last month, when the market slumped. Reports lowering targets totaled 827, more than double the 411 upgrades. That was the opposite of the pattern through the first half of this year, when monthly upgrades outnumbered downgrades by 2.2 to 9.7 times.
The KOSPI has been locked in a listless range this month. It has not closed above 7,000 since the 23rd of last month, when it finished at 7,096.89. The index closed at 6,788.88, down 1.79% from the previous session.
Still, some positive signs are emerging. Twenty-two of 26 sectors declined last month, but small- and mid-cap stocks have recently outperformed large caps, a sign that momentum once concentrated in semiconductors is rotating into other sectors. Improving earnings forecasts are also seen as a potential support for the market. The KOSPI's 12-month forward earnings per share has risen about 6% from the end of last month, helped by export growth led by semiconductors and rising DRAM spot prices.
The KOSPI's 12-month forward price-to-earnings ratio, by contrast, has fallen from the end of last month. The index has not risen as fast as forward EPS. Analysts say valuations remain historically low because share prices have not kept pace with higher earnings expectations.
The retreat in market volatility, which spiked during last month's plunge, is another positive. The KOSPI 200 Volatility Index, which surged after the launch of single-stock leveraged exchange-traded funds and exceeded levels seen during the 2008 financial crisis, has fallen back to around mid-April levels. Investor sentiment toward semiconductors has also recovered on the back of large shareholder return programs announced in succession by Samsung Electronics and SK hynix.
Some analysts caution that recent target price trends alone are not enough to conclude that the market has turned optimistic. Over the past week, 150 reports maintained existing targets, far outnumbering the 47 upgrades and 42 downgrades. While downgrades are subsiding, a wait-and-see stance remains strong, with analysts looking to confirm coming earnings and market direction rather than aggressively raising expectations. Retail investor sentiment has also weakened sharply.
"The current VKOSPI level still far exceeds the long-term average, so it is too early to conclude that the market has entered a normalization phase simply because volatility has eased," said Jung Hee-chan, an analyst at Samsung Futures. "What matters going forward is whether the market's fundamentals improve further through expanded shareholder returns and a recovery in foreign investor flows."
