'Earnings estimates intact while share prices fell' — Korea ETF forward P/E at 5.17x

Single-stock leveraged ETF turnover plunges to one-tenth of peak 15 trillion won level

Simultaneous selling by institutions, foreigners and retail a concern; SCHD, XLE flagged

Park Woo-yeol, a researcher at Shinhan Investment, presents on the theme "An ETF Gourmet Journey" at a press briefing held at Korea Exchange in Yeouido, Seoul, on Tuesday. [Song Ha-jun]
Park Woo-yeol, a researcher at Shinhan Investment, presents on the theme "An ETF Gourmet Journey" at a press briefing held at Korea Exchange in Yeouido, Seoul, on Tuesday. [Song Ha-jun]

Shinhan Investment said Tuesday that the price-to-earnings ratio of the Korean stock market has fallen to near-bottom levels following a sharp recent decline. With corporate earnings forecasts — led by the semiconductor sector — remaining intact while share prices have dropped sharply, valuation pressure has eased, the brokerage said. It also projected that the extreme volatility seen in June and July, amplified by single-stock leveraged ETFs, is unlikely to recur for now, as trading in those products has fallen to about one-tenth of its peak.

"In terms of P/E, the Korean market has come down to the bottom," Park Woo-yeol, a researcher at Shinhan Investment, said at a press briefing held at Korea Exchange in Yeouido, Seoul, on Tuesday. "Earnings estimates haven't been revised down at all — it's just the share prices that have fallen." He added that from a fundamentals perspective, "the P/E is at a floor and earnings momentum is still solid."

In a comparison of country-specific ETFs listed in the United States, Shinhan Investment found that the iShares MSCI South Korea ETF (EWY) carried a forward P/E of 5.17 times and a price-to-book ratio of 1.64 times. The fund posted a three-month return of minus 12.5 percent, though its one-year return reached 155.1 percent. The P/E deviation was assessed as being at a "floor" level, with earnings forecasts continuing to improve even as share prices underwent a steep correction.

The semiconductor sector showed a similar divergence between share prices and earnings expectations. "From June through August, semiconductor analysts around the world — not just in Korea — kept raising their earnings estimates," Park said. "Valuations are still cheap and companies are generating strong profits, yet share prices have fallen sharply." Shinhan Investment assessed that ongoing earnings improvement across major markets including the United States and Korea, as well as in the semiconductor sector, makes equities more attractive than other asset classes.

The market impact of single-stock leveraged ETFs, which amplified volatility in June and July, has also diminished significantly. According to Shinhan Investment, the combined average daily trading value of those ETFs at that time exceeded 10 trillion won ($7.45 billion), but has since plunged to about one-tenth of that peak. The Kospi Volatility Index (VKOSPI) hit successive all-time highs in June and July, shortly after those ETFs were listed.

"In June and July, single-stock leveraged ETFs were trading at a combined daily average of around 15 trillion won, but data from the past week shows that figure is now at one-tenth of that level," Park said. "I think we won't see that kind of volatile market for now."

When single-stock leveraged ETF trading surges, market makers increase their hedging activity in the underlying assets, which in turn amplifies share price swings. When prices fall, additional selling by market makers deepens the decline. Park described it as "a structure where selling begets more selling," adding that "investors are not trading leveraged ETFs as heavily now, so much of that pressure has dissipated."

However, the disconnect between corporate earnings forecasts and market flows remains a concern. Even as the earnings revision ratio improves, institutions, foreign investors and retail investors have all turned to net selling. Park called it "a part where the fundamentals and the supply-demand picture don't add up."

Shinhan Investment proposed a portfolio that trims the bond allocation from the conventional 60 percent equities and 40 percent bonds mix to a new split of 60 percent equities, 30 percent bonds, 8 percent alternative assets and 2 percent digital assets. Among equity ETFs, it named the Schwab US Dividend Equity ETF (SCHD) as a preferred product for exposure to high-dividend US stocks. For hedging geopolitical risk, it recommended the Energy Select Sector SPDR Fund (XLE), which invests in US energy stocks. The Health Care Select Sector ETF (XLV) and the SPDR S&P Biotech ETF (XBI) also made the preferred list.

"The top three sectors in US dividend stocks are energy, healthcare and consumer staples — and all three are currently functioning as leading sectors," Park said. "With wars continuing, I view dividend stock ETFs that pool companies with strong cash flows as my top pick right now." Shinhan Investment noted that US dividend stocks, unlike their domestic counterparts, carry a higher weighting in healthcare and energy, giving them both defensive qualities and upside momentum.


hajun825@heraldcorp.com