Valuation of the Korean stock market

The performance of the Korean stock market is largely driven by its two largest companies, Samsung Electronics and SK Hynix, which together account for roughly two-thirds of the MSCI Korea index. While sustained excess demand for memory chips produced by both companies is expected in the near future, doubts remain about the profitability of their massive investments in artificial intelligence (AI). This, along with related factors such as increased competition from China, has contributed to the recent market correction.

Profit prospects, especially for AI-related companies, have actually improved in recent months. This is due to a very favorable supply and demand situation, not only in the chip sector but also in areas such as electrical equipment, for example, transformers.

At first glance, the Korean market appears attractively valued, with a price-to-earnings (P/E) ratio below 5. However, the sustainability of Samsung Electronics and SK Hynix's profitability remains a critical issue. In terms of price-to-book ratio, Korea is valued in line with other emerging markets.

The demand for electricity supply is set to become significantly more important in the future, requiring substantial investment given an infrastructure that is often outdated or even nonexistent. AI further amplifies this megatrend.

Chinese companies' AI models appear to be increasingly competitive and, generally, more profitable than their US counterparts. Some providers, such as Moonshot AI, are not yet publicly traded, while others, such as Alibaba, are also developing powerful AI models. However, we remain cautious, as questions regarding the monetization and profitability of these investments remain entirely open.

We remain convinced that both electrification and AI are megatrends. However, these developments are not translating into a consistent and linear upward trend in stock prices. As a result, we have rebalanced our positions following the rally experienced by Korea, driven in part by the euphoria of retail investors.

Author: Dr. René Nicolodi, head of equities at ZKB/Swisscanto