Semiconductor Peak-Out Fears Weigh on Kospi, but Brokerages See Buying Opportunity

Brokerages said the Kospi index has become more attractive on valuation grounds despite volatility, with valuations falling to historically low levels and deepening its undervaluation appeal. Analysts said semiconductors, the AI semiconductor cycle, the second-quarter earnings season, and global Big Tech earnings along with broader capital spending expansion will be the key variables driving the market’s direction. They said the Kospi’s PER has fallen to levels last seen during the global financial crisis, below 7 times, making a staggered buying strategy appropriate while cautioning against panic selling. Brokerages expect South Korea’s stock market to remain volatile in the week of July 13-17 as investors assess whether fears of a peak-out in semiconductors — a decline after the cycle tops out — are justified. Even so, valuations have fallen to historically low levels, raising the chances that equities will respond more strongly to positive news than to fresh negatives. According to the financial investment industry on July 12, NH Investment & Securities projected the Kospi to move in a range of 6,900 to 7,900 this week. That implies upside of as much as 5.67% from the previous session’s close of 7,475.94. A key inflection point will be the June U.S. consumer price index report due on July 14. The Cleveland Fed’s Inflation Now estimate puts June CPI at 3.92%, down from 4.2% a month earlier. If confirmed, that could ease concerns over further Federal Reserve rate hikes and help stabilize Treasury yields and the dollar at lower levels. The second-quarter earnings season, which begins this week, could also shift market sentiment. Dutch semiconductor equipment maker ASML is scheduled to report on July 15, followed by Taiwan foundry company TSMC and hard-disk drive maker Seagate on July 16. Na Jung-hwan, an analyst at NH Investment & Securities, said their earnings and any upward revisions to guidance would help gauge the direction of the artificial intelligence semiconductor cycle. Lee Kyung-min, an analyst at Daishin Securities, said the Kospi’s pullback ahead of earnings season has broadened the appeal of undervalued sectors. Semiconductors, which had been in overvalued territory, have also moved into an undervalued range, he added. Lee said 7,000 is a key support level for the Kospi. A break below that mark would signal an undershooting phase, or a short-term excessive drop. He advised investors to use volatility to build positions in stages. Still, volatility may intensify as fund flows shift ahead of earnings reports later in July from global Big Tech companies including Google, Microsoft and Amazon. The securities industry says a sustained rebound in equities will require upward revisions to earnings estimates and developments that support higher capital spending by major technology companies. Even so, Lee said investors should avoid panic selling because the market correction has made valuations more attractive. The Kospi has fallen more from its peak than it did immediately after the outbreak of war between the U.S. and Iran, while valuations have dropped to lower levels, increasing the market’s appeal from an investment perspective. At that time, the Kospi’s forward price-to-earnings ratio stood at 7.12. It has since fallen to 6.17. This is the first time the ratio has dropped below 7 since the global financial crisis, when the Kospi traded below 1,000 and its forward PER was 6.27. Lee said a catalyst for a rebound could emerge before long.