South Korean stocks have recently seen significant valuation compression due to the deleveraging and high volatility in the semiconductor sector. A Bloomberg strategy article points out that the KOSPI's forward price-to-earnings ratio has fallen to around 5, only half of its long-term average. Looking at the earnings expectations implied by the valuation,
the current price roughly reflects the market pricing in a 50% decline in future corporate earnings; in comparison, the largest decline in South Korean corporate earnings during the global financial crisis was approximately 45%.
This extreme pricing is related to the highly concentrated structure of the South Korean stock market: Samsung Electronics and SK Hynix together account for nearly half of the index weight, and technology stocks account for about 53%, thus significantly amplifying changes in semiconductor earnings expectations and leveraged funds. Recently, the KOSPI has fallen by about 33% from its June high, with Samsung and SK Hynix contributing the vast majority of the market capitalization loss.
However, "cheap valuation" does not mean that earnings risks have disappeared. Currently, South Korea's leading memory chip manufacturers are still benefiting from AI chip demand and generating substantial cash, while the industry continues to expand capital expenditures.
Therefore, the current valuation truly reflects the market's extremely pessimistic expectations regarding the sustainability of high semiconductor earnings: If the future decline is merely a normal cyclical downturn, rather than an earnings collapse approaching the level of a financial crisis, the current pricing may be excessively discounted; conversely, if the AI and storage cycles reverse rapidly, the low valuation itself cannot provide protection.
