The combined wave of global semiconductor sell-offs and momentum reversals has pushed the South Korean stock market into a historically undervalued range.

The KOSPI index has fallen nearly 25% from its June 22 high, with a further 8.8% drop this week alone, sending its forward price-to-earnings ratio to its lowest level since 2004.

Both Goldman Sachs and UBS noted in their latest reports that current valuations present a positive risk-reward profile, though near-term volatility is expected to persist.

In its Korea weekly report dated July 17, Goldman Sachs pointed out that the KOSPI's 12-month forward P/E ratio had fallen to 5.78 times as of July 16, lower than the trough during the 2008 global financial crisis and marking its lowest point since 2004.

Even assuming earnings downgrades reach the worst level of the financial crisis (41%) and applying the valuation multiples seen at the 2008 EPS trough, the KOSPI still shows a positive risk-reward profile.

UBS maintained its KOSPI target of 9200 points (implying 9 times next-twelve-month P/E) and shifted its portfolio strategy to a barbell approach.

There has been a marginal shift in foreign capital flows.

Goldman Sachs data shows that foreign investors turned net buyers of the KOSPI this week, with inflows concentrated in the automotive and retail sectors, amounting to net purchases of approximately 19 billion won.

The Korean won appreciated 1.2% against the US dollar and 1.5% against the Japanese yen this week.

However, Goldman Sachs' Korea Equity Risk Barometer currently reads -2.7, still in deep risk-off territory.

Valuations Plunge Below Historical Extremes, Risk-Reward Turns Positive

The KOSPI fell 8.8% this week, with technology, construction, and retail sectors leading the declines, while chemical, bank, and insurance sectors showed relative resilience.

The MSCI Korea Index fell 10.2% in US dollar terms.

Goldman Sachs stated that KOSPI forward earnings are highly correlated with index movements, and this round of index decline is significantly excessive relative to earnings prospects.

The report cited stress test data showing that even assuming a 41% cut in earnings per share—matching the worst level during the global financial crisis—and applying the historical valuation multiple (13 times) from the 2008 EPS trough, the corresponding KOSPI level would be around 8965 points, still well above current levels, indicating the current price already possesses a positively skewed risk-return characteristic.

From a cross-sectional valuation perspective, the KOSPI's 12-month forward price-to-book ratio has retreated to 1.43 times from its June 22 peak, while the forward return on equity (ROE) has remained high at around 25%.

Goldman Sachs noted that ROE has historically been a core driver of the KOSPI's P/B ratio, and the current divergence between valuation and fundamentals is rare.

The UBS report added that excluding Samsung Electronics and SK Hynix, the overall forward P/E for the KOSPI is 8.79 times, still below its historical average, further evidencing the undervaluation of the broader market.

New Single-Stock Leveraged ETF Rules Take Effect, Impact May Be Limited

The UBS report detailed a series of regulatory measures by the Korean government targeting single-stock leveraged ETFs: the minimum cash margin requirement will be sharply increased from about 3 million won to 30 million won starting August 5; the use of substitute collateral will be prohibited from August 19; new product listings will be suspended, and marketing of existing products will be immediately banned; the minimum trading unit is planned to be raised from 1 unit to 20 units in November.

UBS analysis suggests that suspending new listings and the 30 million won full cash margin requirement are the most substantive measures for curbing speculative trading.

Considering that 30 million won is equivalent to about 7% of total assets and 27% of financial assets for households at the third income percentile, this threshold will significantly reduce retail investor participation.

In contrast, extending investor education periods and raising the minimum trading unit (20 units equating to about $190) are expected to have limited practical effect.

Notably, UBS pointed out that market-driven price adjustments have already completed part of the "deleveraging" process ahead of the new rules—the total size of single-stock leveraged ETFs (including those listed domestically and overseas) has fallen from a peak of about 2.4 trillion won on June 25 to about 1.7 trillion won currently.

If held since May 27 (the listing date for domestic single-stock leveraged ETFs), paper losses would be 30% to 32%; if held since June 25 (the stock price peak), losses would be as high as 44% to 55%.

Overall Leveraged ETF Scale Contracts, Margin Risks Remain Manageable

Goldman Sachs data shows that, affected by recent market sell-offs, the total size of domestic leveraged ETFs has retreated to levels before the launch of single-stock leveraged ETFs.

Although the share of leveraged ETFs within the Korean ETF market has continued to rise, as of July 16, their size accounted for about 5% of total ETF assets under management, indicating a relatively limited overall scale.

Regarding margin risk, Goldman Sachs cited data showing that as of July 15, the margin call receivable ratio rose to 3.8%, and broker receivables increased to 1.5 trillion won, with both metrics trending higher.

Margin debt balances fell from a peak of 38 trillion won to 33 trillion won, but measured by a market-value-adjusted ratio, this ratio remained stable at around 0.5%.

Meanwhile, investor deposit balances have risen to 110 trillion won, causing the ratio of margin debt to deposit balances to decline noticeably, suggesting limited systemic risk from overall leverage exposure.

Retail investor fund flows have shown some resilience.

Goldman Sachs data indicates that despite ongoing market volatility, net inflows from retail investors into both traditional ETFs and leveraged ETFs have not ceased.

Foreign Investors Turn Net Buyers, Sector Divergence Persists

Goldman Sachs data shows that foreign investors recorded net purchases of about 19 billion won in the KOSPI market this week, mainly flowing into the automotive (net buy 19.6 billion won) and retail (net buy 11.8 billion won) sectors, while the technology sector saw net selling of about 76.6 billion won, indicating significant divergence in foreign capital across sectors remains.

Institutional investors were net sellers of 119.1 billion won this week, while retail investors were net buyers of 95.3 billion won.

Looking at year-to-date cumulative foreign flows, foreign investors have net sold approximately 16.1 trillion won worth of KOSPI shares this year, indicating overall outflow pressure has not fundamentally changed.

The UBS report noted that given uncertainty around AI demand prospects and potential volatility in earnings expectations for Samsung Electronics and SK Hynix, market volatility may remain elevated in the near term—and high volatility, in turn, could help further compress leveraged ETF assets under management.

Strategic Differences: Goldman Bullish on Valuation, UBS Adopts Barbell Approach

Faced with persistent volatility, the two institutions' strategic orientations differ.

Goldman Sachs maintains its 12-month KOSPI target of 12000 points, believing current valuations already reflect pessimistic expectations, and the positive risk-reward profile supports buying on dips.

UBS, while maintaining its 9200-point target, has shifted its portfolio strategy to a barbell structure to navigate recent AI demand uncertainty and potential volatility in Samsung Electronics and SK Hynix's earnings outlook.

New additions like Shinsegae (consumer), Celltrion (healthcare), and Samsung E&A (construction) represent defensive and value-oriented allocations, while removed stocks were concentrated in previously strong cyclical and growth sectors.

UBS pointed out that the high turnover of single-stock leveraged ETFs—equivalent to 54% of SK Hynix's trading volume and 24% of Samsung Electronics' trading volume since July—means ETF-related fund flows could have a greater impact on underlying stocks than the surface data suggests.

This structural disturbance factor is expected to gradually fade after regulatory tightening but will likely maintain high volatility in the short term.