The South Korean stock market is experiencing one of the most severe rounds of consecutive declines in recent years, but Goldman Sachs analysts believe that the root cause of this selling pressure lies in the structural absence of buying interest, rather than a collapse in fundamental demand. With valuations having dropped to historically low levels and the profit cycle not yet reversing, Goldman Sachs maintains its target of 12,000 points for the one-year period unchanged.

According to a latest report from Goldman Sachs' Asian equity sales desk cited by Zuifeng Trading Desk, KOSPI has seen consecutive seven days of declines, with the maximum cumulative drop being about 20%, which at one point triggered the circuit breaker mechanism during trading. Such a decline is only comparable to the -20.5% during the impact of the COVID-19 pandemic in March 2020 and the -15.1% when the U.S. credit rating was downgraded in August 2011 over the past 20 years. Meanwhile, foreign investors have been net sellers for eight consecutive trading days, with the technology sector seeing a net sale of $11.6 billion within these eight days. KOSPI saw an overall net sale of $13.4 billion, of which technology accounted for 86%.

However, Tim Moe, the chief equity strategist for Goldman Sachs in Asia-Pacific, stated that the risk-return profile of Korean stocks remains favorable. He maintains a 12-month target of 12,000 points and holds high confidence in the long-term hardware cycle of AI. Based on the current level of around 5,700 points, Goldman Sachs' target implies a potential upside of about 110%. Analysts pointed out that current valuations are at extremely low levels, with a forward price-earnings ratio of 5.1 times, which is 2.7 standard deviations below the average; the price-to-book ratio is 1.8 times, corresponding to a 26% forecast for ROE over 24 months; and the earnings growth trajectory also supports a bullish outlook for the medium term.

Pressure from selling: Corporate buybacks and exits coincide with concentrated reductions in foreign holdings

According to a source from Goldman Sachs' Asian equity sales trading desk, the direct trigger for this round of decline was the targeted withdrawal of corporate repurchase activities. Samsung Electronics completed its stock repurchase plan on October 6th, and SK Hynix also gradually ceased its buying operations at the end of the trading day. The withdrawal of these two companies' repurchase efforts resulted in the market losing an important source of price support during a critical time period.

Against the backdrop of a lack of buying interest in the domestic market, the concentrated reduction of foreign capital's holdings directly broke through several psychological resistance levels, triggering a chain reaction of forced liquidations. Goldman Sachs' Asian equity sales desk stated that approximately 80% to 87% of the foreign selling was concentrated on two heavyweight stocks in the storage sector: Samsung Electronics and SK Hynix. This highly concentrated selling pattern indicates that the pressure to sell did not stem from a revaluation of the overall demand prospects for the Korean market, but rather from liquidity-driven actions by specific institutions within a particular time frame.

From a timeline perspective, repurchase exits, foreign capital reductions, and forced liquidations occurred simultaneously during the same period, creating a typical 'buying vacuum' market situation—price declines were not due to exceptionally strong selling forces, but rather because there was a brief yet intense gap in the structure of buyers willing to take over the market.

Valuation and profitability: Whether the bullish arguments hold up

The medium-term bullish outlook of Goldman Sachs' Asia-Pacific equity strategy team is based on two interdependent pillars: extremely low valuation multiples and a rapidly recovering earnings trajectory.

In terms of valuation, KOSPI has a forward P/E ratio of 5.1 times, which is 2.7 standard deviations below the historical average; the price-to-book ratio is 1.8 times, corresponding to a 26% 24-month forward ROE. The relationship between the price-to-book ratio and the return on earnings indicates that the current pricing does not fully reflect the potential for recovery in the earnings cycle.

On the earnings front, Goldman Sachs' Asia-Pacific equity strategy team predicts that the earnings growth rates for the Korean market will be 320%, 35%, and 20% for the years 2026 to 2028, respectively. The core driving force behind this trajectory is the AI hardware demand cycle. Samsung Electronics and SK Hynix, as major suppliers of global memory chips, will directly benefit from the continued expansion of data center capital expenditures.

It is worth noting that the won exchange rate is also an important variable in the profit-making process. Goldman Sachs' Emerging Markets Strategy team stated that Samsung and SK Hynix need to maintain a trade surplus conversion ratio of 70% to 80% to cover local won expenditures such as taxes, capital expenditures, shareholder returns, and employee cash salaries; this demand for currency conversion exerts a continuous downward pressure on USDKRW. The Governor of the Bank of Korea, Shin, also mentioned that a further appreciation of the won is beneficial for enhancing residents' purchasing power and reiterated that the bank will maintain a restrictive monetary policy until inflation converges to the target level.

Three risks: Which one will materialize first?

Tim Moe clearly lists the following three items as trackable monitoring risks, rather than factors that could drag down the benchmark scenario; however, if any of them deteriorate substantially, the path towards 12,000 points will need to be re-evaluated.

Firstly, the durability of the storage cycle. Currently, the bullish logic heavily relies on the continuous demand for storage chips from AI hardware; if there are signs of a peak in demand for HBM or DRAM, the path of profit growth will face direct downward pressure.

Secondly, there is the issue of retail leverage and the existing level of leverage ETF. If retail investors begin to deleverage from their current orderly state and this evolves into a stampede of forced liquidations, it will add a new source of selling pressure on top of the reduction in foreign capital holdings, further suppressing the market's recovery momentum.

Thirdly, the competition of China's open-source AI models. If Chinese open-source models continue to capture market share and suppress the willingness of global hyperscale cloud vendors to invest in computing power capital, it will weaken the expectations for the shipment volume of storage chips on the demand side, thereby shaking the underlying assumptions of the entire profit growth trajectory.

Goldman Sachs also reminds investors to pay attention to two upcoming key dates. On October 27th, SK Hynix will announce its third-quarter earnings, which will allow the market to assess the actual strength of storage demand and the management's latest judgment on the durability of the cycle. From November 18th to 20th, Samsung Electronics will make a dividend payment of approximately 40 trillion Korean won, and at that time, the demand for foreign exchange conversion will provide temporary support for the Korean won exchange rate. This period is also an important window to observe whether net foreign selling will subside.

The above content is from the Zhuifeng Trading Platform.