Following its downgrade in September this year, UBS has once again lowered its 12-month target for the South Korean stock market, cutting the KOSPI target from 8,000 points to 7,500 points, a 6% reduction, corresponding to a forward price-to-earnings ratio of 6 times.
According to a report dated October 29, UBS noted that the core drivers of this downgrade are exchange rate movements and bottom-up earnings revisions, with mounting macroeconomic pressures set to weigh on earnings per share, while the stock market has not yet fully reflected the complete impact of the won's appreciation.
The KOSPI has recently retreated about 10% from its high, approaching its downside value range of 5,000 points (corresponding to 4 times price-to-earnings). The KOSPI 200 put/call ratio has hit negative one standard deviation, a signal that historically often precedes an oversold market. UBS believes that current market risk aversion is excessive, and without a sustained earnings downturn or exogenous shock, further downside is limited.
Looking ahead, UBS expects the KOSPI to remain under pressure through year-end but is optimistic about recovery prospects in 2027, supported by strong earnings per share growth, improved shareholder returns, easing liquidity constraints, and an approaching end to the rate hike cycle. UBS sets its upside target at 9,300 points (corresponding to 8 times price-to-earnings).
Double Blow from Exchange Rates and Earnings
This marks the second adjustment to UBS's KOSPI target this year. On September 18, UBS analyst Yong-Suk Son cut the 12-month KOSPI target from 8,800 points to 8,000 points, a reduction of nearly 10%, citing macroeconomic headwinds from rising interest rates, a stronger won, and climbing oil prices. At that time, UBS noted that the 10-year government bond yield had jumped from 3.4% at the start of the year to 4.5%, the Bank of Korea had raised rates twice since July, and oil prices had breached $100 per barrel.
About six weeks later, UBS acted again, pushing the target further down to 7,500 points. The core drivers of this downgrade are exchange rate movements and bottom-up earnings per share revisions. UBS analysis shows that the won has appreciated about 15% since June, which, all else being equal, would drag down KOSPI earnings per share by approximately 2% in 2026 and 10% in 2027. Meanwhile, the monthly revision to consensus earnings per share in October was only -0.5%, not yet fully reflecting the complete impact of the won's appreciation, meaning further downward revisions are likely.
At the sector level, chemicals, entertainment, defense, autos, consumer discretionary, diversified financials, internet, and cosmetics sectors all saw the largest earnings downgrades in 2026 and 2027 expectations; energy, transportation, construction, and insurance sectors were relatively upgraded.
Foreign Investors Continue Net Selling, Sentiment Hits Extremes
Fund flow data reveals another aspect of recent market pressure. Since October, foreign net selling has reached 19 billion won, becoming the market's main source of selling pressure, partially absorbed by corporate buybacks (9.9 billion won), retail investors (5.8 billion won), and local institutions (3.2 billion won).
However, UBS notes that marginal improvements have emerged in fund flows: foreign net selling has recently narrowed, even turning to net buying this week; retail investors have turned to net selling over the past two weeks, while corporate buybacks are expected to gain support after SK Hynix restarted its buyback program; pension funds remain on the sidelines but may trigger entry if the KOSPI moves closer to its downside value range, potentially activating their asset allocation targets.
From a valuation and sentiment perspective, the KOSPI currently trades at 1.1 times next-twelve-month price-to-book, roughly in line with its historical average, with a dividend yield of 2.7% (positive one standard deviation from the historical average), providing some valuation support. Excluding Samsung Electronics and SK Hynix, the KOSPI's next-twelve-month price-to-book is only 0.9 times (negative 0.6 standard deviations), and its next-twelve-month price-to-earnings is 6.6 times (negative 2.6 standard deviations), placing valuations at historically low levels.
Earnings Reset Rather Than Downturn Cycle, 2027 Recovery in Sight
Despite short-term pressure, UBS maintains a relatively optimistic medium-term outlook for the South Korean stock market. UBS forecasts KOSPI earnings per share growth of +258% in 2026 (consensus: +278%) and +33% in 2027 (consensus: +38%), with its forecasts already incorporating exchange rate pressures and being more conservative than consensus.
UBS emphasizes that the current earnings per share downgrades are more of an exchange-rate-driven "reset" rather than the beginning of a sustained earnings downturn cycle. The technology sector remains the largest contributor to earnings growth in 2026, with battery materials, utilities, and chemicals sectors expected to take the lead in 2027.
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