South Korea markets will offer the highest earnings growth next year, Goldman Sachs says

Pedestrians walk across a road in Seoul on June 20, 2023.

Anthony Wallace | Afp | Getty Images

South Korean stocks have so far emerged as an undervalued and underloved part of Asia-Pacific equity markets but that is exactly what could make them attractive to investors next year, according to Goldman Sachs.

Goldman even argued that South Korea markets offer the highest potential earnings growth in 2024 in the Asia-Pacific region as its semiconductor sector recovers from steep profit declines. The investment firm remains overweight on South Korean stocks.

“We forecast EPS growth to rebound to 54% in 2024 and to grow 20% further in 2025,” Goldman said with regards to Korea’s Kospi benchmark index.

South Korea is Asia’s fourth largest economy but its markets are often considered undervalued by analysts, leading to what is sometimes referred to as the “Korea discount.”

The Kospi as a whole has a price-to-book ratio of 0.92 and its price-to-earnings ratio is at 18.93. A price-to-book ratio measures whether a company’s share price is undervalued, with a number below 1 indicating the stock may be below fair value.

Defense stocks were among areas of the South Korean stock market that look the most attractive, according to Goldman Sachs, which said the country has been one of the world’s largest weapons suppliers apart from China.

Goldman noted that South Korean defense names with strong profit growth expectations, including Korea Aerospace Industries, Hanwha Aerospace, Hyundai Rotem, Hanwha Systems and LIG Nex1, should be good places to hedge geopolitical risks given the country’s strong presence in the global military market.

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Goldman says such valuations can offer greater return to investors in the next 12 months, while South Korea’s recent ban on short-selling until the end of June 2024 is also a potential catalyst.

Financial authorities in South Korea banned short selling in early November. Short selling is when a trader sells borrowed shares to buy back at a lower price and pocket the difference.

“Historically, post a short-selling ban, KOSPI has performed strongly by at least 10% over the following 6 months.”

So far the Kospi is up over 12% this year and is one of the top performing major stock markets in Asia, excluding Japan.

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