Why Kospi could be headed for 3,000

Stock analysts are setting bullish targets on South Korea‘s main stock market index Kospi, as optimism for strong earnings growth next year abound, while investors backed by ample market liquidity are zeroing in on equities as their choices are increasingly limited.

The views came as the Kospi on Wednesday resumed its record run by closing at 2,755.47. The index rebounded 2 percent from a day prior when Kospi retreated from the five-trading-day rally since the start of December. Kospi, whose combined market cap of over 900 constituents exceeds 1,890 trillion won ($1.7 trillion), has been navigating new highs as foreign investors turned into net buyers of Korean stocks from November.

An estimate by international investment banking group JPMorgan’s Asia Pacific Equity Research team showed Wednesday that it set its Kospi target at 3,200 by the end of 2021, as it continues to be an outperformer among MSCI emerging-market countries.

“We believe higher valuation should be justified on the back of increasing optimism on COVID-19 vaccination and higher visibility on earnings recovery,” read JPMorgan‘s report “Korea Year Ahead 2021.”

The stock market is seeing an increased aggregate price-to-earnings valuation as more health care stocks and battery stocks become large caps, as well as a potential upside to earnings next year that is driving higher valuation multiples of the overall market, it added.

Meanwhile, Korean retail investors supported by ample liquidity -- as interest rates have remained at near-zero levels and the government laid out stimulus packages -- are expected to witness tougher government real estate policies to tackle housing prices, which will narrow retail investors’ destinations.

“Equities remain the top preferred investment method (in Korea) propelled by strict restrictions on the housing market,” wrote JPMorgan.

The forecast comes along with local analysts‘ optimism for Korea’s exports momentum next year as the macroeconomic setting improves.

Global demand for manufactured goods will add to the upside potential of Korean firms‘ profits and the valuation of the stock market in the export-driven economy, as the COVID-19 impact wanes with the projected vaccine commercialization and weak US dollar is further likely to attract foreign investors, wrote Lee Kyoung-min, a strategist at Daishin Securities.

“As December passes, investors should be ready for the new era when Kospi is headed for 3,000 and above,” Lee wrote.

But Lee added that a market correction from the recent rally is expected before end-2021, as some retail investors are expected to unload stocks before year-end to avoid taxes imposed on those holding at least 1 billion-won worth of shares of a single company, while the Korean won may unexpectedly weaken against the US dollar.

Other analysts also forecast that Kospi would exceed the 3,000 mark, given the average 12-month trailing price-to-book ratio of the MSCI Korea Index since 2002 that stood at 1.17 as of Dec. 4. Bruce Lee, a quantitative analyst at Kakaopay Securities, said the Kospi market cap could grow 11 percent next year to just over 3,000, based on its time series analysis of trailing price-to-book ratio of Kospi.

“A time series analysis appears to be more justifiable (than a peer group valuation) to forecast the stock market in a melt-up rally,” Lee wrote.

By Son Ji-hyoung (consnow@heraldcorp.com)