South Korean stocks have underperformed for the past three months, but that’s created an opportunity to buy, Societe Generale said.
“We think double-digit upside in Korean equities is very plausible given its strong correlation with global growth and the tech cycle (still very much alive), plus additional support form the consumption sector this year,” it said.
The country’s stocks have fallen amid concerns of peaking memory chip prices and faltering iPhone X sales, but the cyclical nature of the market, with its dependency on the global trade and tech cycle, creates intermittent opportunities to hop on during the growth cycle, the bank said in a note on Friday.
”The technology sector remains key. However, the increased contribution from the consumer sector, thanks to improving relations with China and the gradual pick-up in domestic consumption, suggests that earnings growth will be more widespread this year,” it said. “And the exports momentum and management guidance during fourth quarter results indicates it is too early to call the end of the tech cycle.”
Societe Generale added that South Korean equities appear “somewhat undervalued” at less than nine times 12-month forward earnings.
“We think the recent de-rating of Korean equities in anticipation of slower earnings growth in 2018 has been overdone,” it said, noting that earnings growth was still estimated at a “robust” 11 percent for 2018 after growing more than 50 percent last year.
It said its sensitivity analysis indicated that an increase in near- and medium-term earnings growth by 1-2 percent, all else constant, implied upside of 7-14 percent for South Korea’s stocks.