A person smiles in front of a digital screen displaying the real-time Kospi index at 7,844.02 in Hana Bank's trading room in central Seoul on May 11. [YONHAP]
The benchmark Kospi’s rapid ascent is unnerving investors wary of a bubble, but optimists say the rally still has room to rise.
The Kospi came within touching distance of 8,000 on Monday, only three trading sessions after breaking above the 7,000 mark for the first time last week. Monday's trading session closed at 7,822.24, up 4.32 percent from the previous session. Another 2.27 percent gain would push it past 8,000.
While the rally's speed has fueled warnings that the market may be overheated, observers believe that solid ground remains for stocks to move even higher.
For starters, investors’ deposits in brokerage accounts have reached a record high. Investor deposits totaled 136.98 trillion won ($93 billion) as of Thursday, according to the Korea Financial Investment Association. The figure has jumped by more than 28 trillion won in a month.
Investor deposits — funds set aside in brokerage accounts for stock purchases — tend to rise when expectations for further gains strengthen.
A newly emerging source of inflows is the “integrated account for foreigners,” which allows overseas investors to buy Korean stocks directly through brokerage accounts in their home countries without opening local accounts. Until now, foreign investors had largely relied on indirect investments through overseas-listed exchange-traded funds (ETFs) — baskets of securities.
Hana Bank employees celebrate Kospi's crossing of the 7,000 threshold at their trading room in central Seoul on May 6. [JOINT PRESS CORPS]
Samsung Securities recently partnered with U.S.-based Interactive Brokers to launch trading services for American retail investors seeking access to Korean stocks. Yuanta Securities Korea, Meritz Securities, Mirae Asset Securities, Shinhan Securities and NH Investment and Securities are also preparing similar services.
Interest from overseas retail investors has been evident online.
“Samsung Electronics and SK hynix remain undervalued relative to their earnings,” said one Reddit user, claiming to be a foreigner investing in Korean stocks. “Once labor strikes trigger a pullback in share prices of Samsung Electronics, I would purchase more."
According to researcher Yoon Yoo-dong at NH Investment and Securities, foreign inflows are likely to expand gradually beyond large-cap stocks into small- and mid-cap shares as overseas investors become more familiar with the Korean market.
A screen shows the Kospi and the exchange rate between the dollar and Korean won at the foreign exchange dealing room of Hana Bank headquarters in central Seoul on April 15. [AP PHOTO/YONHAP]
Leveraged ETFs designed to deliver twice the returns of Samsung Electronics and SK hynix are also set to debut later this month. Mirae Asset Securities estimates that the new products could attract up to 5.3 trillion won in inflows.
If the two chipmakers post second-quarter preliminary earnings that exceed market expectations in early July, the ETF launch could amplify momentum in semiconductor heavyweights and lift the broader market further, some analysts say.
One potential headwind appears to be a behavioral change among foreign investors who have become net sellers at large this month.
Foreigners have sold a net of 9.47 trillion won worth of Kospi-listed shares so far this month, reversing course from net purchases of 1.12 trillion won last month.
Concerns about overheating have also intensified after Korea’s Buffett indicator climbed to a record high.
A monitor shows the Kospi and the foreign exchange rate at the Korea Exchange in western Seoul on May 6. [AP PHOTO/YONHAP]
The Buffett indicator, devised in 2001 by Warren Buffett of Berkshire Hathaway, measures stock market capitalization relative to a country's GDP to gauge whether equities are overvalued.
A reading above 100 percent is generally considered a sign of overvaluation. Korea’s Buffett indicator stood at 260.71 percent on Monday, the highest level since records began. That is above the United States at 225.9 percent, Japan at 239.95 percent and Britain at 119.07 percent.
Some analysts, however, argue that the Buffett indicator alone is insufficient to judge whether the market is overheated. The Kospi’s 12-month forward price-to-earnings ratio (PER), which reflects corporate earnings forecasts based on current share prices, remains around 7.6, suggesting the market is still undervalued. That compares with roughly 20 in the United States and 14 in China.
Kim Hak-kyun, head of research at Shinyoung Securities, said that historically, the Kospi has traded at a PER of around 10, making the current level of seven appear undervalued.
“Excluding Samsung Electronics and SK hynix, the market PER rises to around 12, but even that remains low compared to global markets,” Kim said. “The Buffett indicator, which is based on GDP, has some limitations as it does not count overseas production and sales generated by Korean companies.”
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
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