Goldman Sachs analyst calls Korea market plunge 'technical correction,' sees new highs ahead

The Kospi and other indexes are displayed on a screen at Hana Bank's dealing room in Jung-gu, Seoul, on Monday. [Yonhap]

Goldman Sachs' head of Asia-Pacific equity strategy offered an optimistic outlook on the Korean stock market Monday, even as it suffered one of its sharpest single-day drops in recent memory.

Timothy Moe said the steep decline was a "technical correction" and predicted the market would stabilize and go on to set new highs.

In an interview with Bloomberg TV on Monday, Moe said "a sharp selloff like this in the middle of a long bull market is scary, but it will ultimately prove to be a technical correction." He added that the underlying fundamentals of Korean companies "remain very strong."

Moe also said there were "clear signs" of increased speculative trading among retail investors in Korea, including a surge in leveraged ETF activity. "What we're seeing now is the unwinding of leveraged buying that has been amplified," he said.

Goldman had raised Kospi target to 12,000

Goldman Sachs raised its Kospi target from 9,000 to 12,000 on June 3, citing strong earnings growth and continued undervaluation in the memory chip sector.

In that report, Goldman said the Kospi had "roughly 37 percent additional upside potential" and that while short-term corrections were possible, the market remained "highly attractive for investment."

Goldman said earnings were "the key driver of Asian markets right now," pointing to a 185 percent jump in first-quarter IT sector profits and calling Korea a prime example.

The bank said the consensus earnings growth forecast for Kospi-listed companies had risen from 48 percent at the start of the year to 277 percent, fueling the index's rally. It added that earnings prospects for the broader market — excluding Samsung Electronics and SK Hynix — were also improving sharply, and that Korea showed "the strongest earnings momentum in Asia."

However, Goldman cautioned that the concentration of enthusiasm around Samsung Electronics and SK Hynix, combined with rising speculative activity through retail investors and leveraged ETFs, could amplify the risk of a correction.

Kospi, Kosdaq plunge 8–9% on Monday

The Kospi and Kosdaq both triggered circuit breakers and sell-side sidecars Monday — halting trading temporarily on both markets — as the indexes plunged more than 8 percent and 9 percent, respectively.

The simultaneous activation of both mechanisms on both markets was the first such occurrence in roughly three months, since the outbreak of the Iran war on March 4.

The circuit breaker activation suspended trading on both the Kospi and Kosdaq for 20 minutes.

The Kospi closed at 7,484.41, down 676.18 points, or 8.29 percent, from the previous session. The index's fall below the 8,000 mark came just 24 days — 14 trading sessions — after it broke through that level for the first time in history during intraday trading on May 15.

The Kosdaq closed at 911.39, down 91.05 points, or 9.08 percent, from the previous session.

yul@heraldcorp.com