UBS Raises KOSPI Target Price to 9200

UBS has raised its target price for South Korea's KOSPI index by 26% to 9,200 points on Wednesday, stating that the price-to-earnings ratio of the index is 12 times after excluding Samsung Electronics and SK Hynix, and that the valuation is within a reasonable range.

The KOSPI has gained 82% in US dollar terms this year, leading global major stock indices. Despite the significant increase, the overall price-to-earnings ratio has fallen to 8 times because the earnings growth has outpaced the stock price increase. Among them, the market value increase of Samsung Electronics and SK Hynix has reached 141%, with a price-to-earnings ratio of only about 6 times.

UBS pointed out that the extreme valuations of semiconductor cyclical stocks can distort the overall data, so the 12 times price-to-earnings ratio after excluding the two companies is more referenceable. The bank believes that the earnings growth of the non-tech sector from 2026 to 2028 is expected to be 68%, 18%, and 15%, respectively, which is enough to support the current valuation.

Profit revision range exceeds expectations

UBS has set the earnings per share growth forecast for the KOSPI index in 2026 at 258%, higher than the market consensus of 235%, which is the highest in Asia Pacific emerging markets. The bank emphasized that the earnings improvement is not solely driven by the AI-driven storage chip recovery.

Since the outbreak of the US-Iran conflict in March of this year, 15 of the KOSPI's 24 sub-industries have seen profit revisions, covering battery chemicals, shipbuilding, construction, industrial and consumer goods sectors. Profit revisions downwards are mainly concentrated in utilities, transportation, internet, automobiles, and defense sectors.

Foreign capital outflows and local buying form a hedge

In terms of capital flows, foreign capital has seen a net outflow of $58 billion so far this year, the largest among emerging markets, and active emerging market funds have reduced their exposure to South Korea. The net outflow of technology stocks is about $52 billion, and UBS believes this is mainly due to position adjustments and individual stock weight restrictions, rather than active bearishness.

It is worth noting that despite continued selling by foreign capital, the proportion of foreign ownership in the KOSPI has risen to 39.2%, up 3 percentage points from the beginning of the year. This is because the market value increase in technology stocks has raised the overall proportion of foreign ownership.

At the same time, retail investors in South Korea have net bought about $32 billion, and local institutions have net bought about $21 billion, basically hedging out foreign capital outflows. According to UBS, citing Evidence Lab survey data, the willingness of retail investors to increase their holdings in Korean stocks has risen to the highest level since the survey started in 2022.

Capital market reforms progress

A series of reform measures recently introduced in South Korea have provided additional support for valuations. Since February of this year, new treasury stocks acquired by listed companies must be retired within one year, and existing treasury stocks must be retired within 18 months. In addition, director's fiduciary responsibilities have been extended to the shareholder level, and the highest tax rate on high dividend income has been reduced from 45% to 30%.

At present, the average proportion of listed company treasury stocks in South Korea accounts for 4% of market value, with some financial sectors accounting for more than 8%. South Korea's estimated dividend payout ratio in 2026 is about 21%, far lower than Australia's 66% and Singapore's 65%.

Risk factors

Under the optimistic scenario, UBS gives a target of 10,500 points, corresponding to the extension of the storage cycle and the improvement of shareholder returns; the pessimistic scenario is 5,500 points, corresponding to the shortening of the storage cycle and the US-Iran conflict triggering stagflation.

The main risks highlighted by the bank include changes in AI investment logic, the market pricing in the peak of the storage cycle ahead of time, interest rate rises and energy shocks leading to profit revisions downwards, and continuous outflow of funds from emerging markets.

Sector preference, UBS is bullish on memory chips, AI infrastructure, defense, shipbuilding and wealth effect beneficiary stocks, and bearish on electric vehicle materials and semiconductor equipment.