The South Korean stock market has surged over 80% this year, but UBS says there's more room to run. On May 21, the bank released its latest Korea equity strategy report, significantly raising its KOSPI target by 26% to 9,200 points from its previous level and maintaining a positive view. The bank believes the breadth of corporate earnings growth far exceeds market expectations, and it's not just Samsung and SK Hynix driving the gains. Excluding these two giants, the KOSPI's forward price-to-earnings (P/E) ratio stands at 12 times, which UBS deems a reasonable valuation.
Up 78% Year-to-Date, Yet Valuations Are Cheaper? The KOSPI has soared 82% year-to-date (in USD terms), making it the top performer among emerging markets and major global markets. However, a curious development has occurred: despite the massive rally, valuations have actually declined. The reason is that earnings growth has outpaced the rise in share prices. The KOSPI's overall forward P/E (NTM PE) has now retreated to 8 times. The primary drivers behind this are Samsung Electronics (SEC) and SK Hynix (SKH) — their combined market capitalization has jumped 141% year-to-date, yet they trade at a P/E of only 6 times. The issue is that institutional investors typically do not value cyclical semiconductor stocks using P/E ratios due to their high volatility; the extreme valuations of these two companies severely distort the overall index data. Therefore, analysts performed a more insightful calculation: excluding Samsung and SK Hynix, the KOSPI's forward P/E is 12 times. This figure is about 1.2 standard deviations above its historical average. Is it expensive? The bank's answer: It's reasonable. The rationale is that earnings growth in the non-tech sectors is equally robust — with projected increases of +68%/+18%/+15% for 2026/2027/2028, respectively, which is sufficient to support this valuation level.
Earnings Growth of 258%, But It's Not Just AI Pulling Analysts have raised their KOSPI index EPS growth forecasts for 2026/2027/2028 to +258%/+46%/+9%, surpassing the market consensus of +235%/+30%/+10% and ranking as the highest among Asia Pacific emerging markets. The +258% figure may appear startling, but the underlying logic is clear: it is primarily driven by the explosive recovery of the memory chip businesses at Samsung and SK Hynix, fueled by AI demand. However, the key point emphasized by analysts is precisely this: the breadth of earnings revisions has exceeded expectations. Since the outbreak of the US-Iran conflict in March 2026, 15 out of the KOSPI's 24 sub-sectors have seen upward earnings revisions, with 8 sub-sectors revised upwards by more than 10%. Sectors receiving upgrades include: batteries/chemicals/metals, shipbuilding, construction, holding companies, industrials, diversified financials, steel/metals, and consumer goods. Sectors facing downgrades are concentrated in: utilities, transportation, internet, automobiles, and defense. In other words, this is not a rally confined solely to tech stocks.
Foreigners Selling, Retail Buying – Who Will Win? Fund flows present one of the most notable contradictions in this report. On the foreign front: Year-to-date net outflows have reached a substantial $58 billion, the largest among emerging markets, with EM active funds having downgraded Korea to underweight. By sector, tech stocks saw the most significant foreign outflows (approximately $52 billion net), but UBS views this more as "passive selling" driven by position adjustments and single-stock weight limits, rather than active bearishness. A counterintuitive data point: Despite foreign selling, the foreign ownership ratio in the KOSPI has actually risen to 39.2%, increasing by 3 percentage points year-to-date. The reason is that foreigners primarily sold tech stocks, while the market value of tech stocks increased more significantly, leading to a relative rise in foreign ownership stakes in other sectors. On the domestic front: Retail investors have been net buyers of approximately $32 billion, and local institutions have been net buyers of about $21 billion, largely offsetting the foreign outflows. The latest Evidence Lab survey indicates that retail investor intentions to increase direct investment in Korean stocks have reached their highest level since the survey began in 2022. Will foreign capital return? The bank believes the probability is high once the overall trend of capital outflows from emerging markets reverses, or if a market rotation from tech to non-tech stocks occurs — EM active funds' current underweight positioning on Korea is already near historical lows.
Policy Reforms: Shareholder Returns Are Improving The report also details progress in South Korea's capital market reforms, which form another logical pillar supporting valuations. Key reforms already implemented include:
Mandatory cancellation of treasury shares (effective February 2026): Newly purchased treasury shares by listed companies must be cancelled within one year; existing treasury shares must be cancelled within 18 months.
Extension of directors' fiduciary duty to shareholders (effective July 2025).
Dividend tax reform (effective January 2026): The maximum tax rate on eligible high dividend income has been reduced from 45% to 30%.
Currently, treasury shares of Korean listed companies average about 4% of market capitalization, with some sectors (like insurance, diversified financials) exceeding 8-9%. The mandatory cancellation policy means these treasury shares will gradually translate into tangible returns for shareholders. In terms of dividend payout ratios, Korea remains at a relatively low level among major Asia Pacific markets (projected around 21% for 2026), significantly lower than markets like Australia (66%) and Singapore (65%), indicating substantial room for improvement.
Target 9,200, Upside to 10,500, Downside to 5,500 UBS provides the following scenario analysis:
Base case target: 9,200 points (9x P/E).
Optimistic scenario: 10,500 points (10x P/E), corresponding to an extended memory chip upcycle and continued improvement in shareholder returns.
Pessimistic scenario: 5,500 points (8x NTM P/E), corresponding to a shortened memory cycle and persistent stagflationary pressures from the ongoing US-Iran conflict.
Key risks include: changes to the AI bull market thesis, the market prematurely pricing in a peak for the memory cycle, earnings downgrades due to interest rate hikes and energy shocks, rising labor costs squeezing profits, and sustained capital outflows from emerging markets. Regarding specific sectors and stocks, the bank maintains the following preferences: Overweight positions include memory chips, AI infrastructure, defense, shipbuilding, and stocks benefiting from wealth effects. Underweight positions include EV materials and semiconductor equipment.
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