Goldman Sachs has slashed its forecast for South Korean stocks after a dramatic collapse in the market, but the Wall Street bank is sticking to its view that Korean equities are deeply undervalued and poised for a strong rebound.
Goldman strategists, including Timothy Moe, cut their 12-month target for the benchmark Kospi index by 25% to 9,000 from 12,000, according to reports on October 25 and 26. The bank had raised its target to 12,000 in June and maintained it through the initial stages of a global sell-off in AI-related stocks.
Despite the cut, the new target implies more than 60% upside from current levels, a measure of how far the market has fallen.
A dramatic fall
The Kospi has fallen more than 35% from its June peak, one of the steepest declines for a major stock market in recent years. It fell a further 1.6% on Monday, October 26, and is down nearly 20% for October alone.
The sell-off has been driven by concerns about artificial intelligence. Korea's stock market is heavily weighted towards semiconductor companies, particularly Samsung Electronics and SK hynix, the world's two largest memory chip makers. Their shares surged earlier this year on booming demand for high-bandwidth memory used in AI data centres.
Goldman said the sell-off reflected heavy AI infrastructure spending, rising financing costs, doubts about returns on AI investment and more conservative equity valuations.
Cheapest in two decades
Goldman's central argument is valuation. The Kospi's 12-month forward price-to-earnings ratio is about four times, a level not seen across 18 major markets since 2006, according to the bank. Korean stocks now trade at roughly half the valuation of Indonesian equities.
"The market is pricing an excessively negative outlook for fundamentals into stock prices," Goldman said.
The bank estimated that current semiconductor stock prices imply a 65% drop in the sector's earnings in 2027, a scenario it described as overly pessimistic. Even companies outside the memory chip sector, which make up about half of the index, trade at a forward price-to-earnings ratio of about 7.6 times.
Where Goldman sees value
Goldman favours several themes in the Korean market: power and industrial companies, which benefit from investment in energy infrastructure and AI data centres; companies improving corporate governance; businesses that would benefit from a recovery in domestic demand; and companies riding the global spread of Korean popular culture, from music and television to cosmetics and food.
The governance theme reflects the Korean government's "Value-up" programme, which encourages companies to improve shareholder returns, increase dividends and buy back shares to address the so-called "Korea discount," the long-standing tendency for Korean stocks to trade at lower valuations than peers in other developed markets.
The memory chip cycle
Memory chips are notoriously cyclical. Prices and profits can swing dramatically as supply and demand shift. During booms, chip makers invest heavily in new capacity, which can lead to oversupply and price collapses when demand slows.
The AI boom created exceptional demand for high-bandwidth memory, allowing Samsung and SK hynix to earn record profits. Investors now fear that a slowdown in AI spending could lead to a sharp downturn in memory prices, though Goldman's analysis suggests the market may be overestimating the severity of any decline.
