Despite A Short-Term Dip, Prospects For The KOSPI Remain Strong

On April 27, I had argued on an article written for Seeking Alpha that the KOSPI stock market index had significant room left to run based on general stock undervaluation, coupled with prospects of lower interest rates and rising exports. The KOSPI had been trading at a level of 2150 on April 27 but has since lowered to under 2100 before rising to a level of 2113.72 at the time of writing. In spite of a temporary dip, I still see the KOSPI as having significant appreciation prospects ahead.

As previously discussed, the KOSPI index trades at a current projected earnings of 11.1 times for the next 12 months - in contrast to a higher ratio of 16.4 for the MSCI global index. Up till now, South Korean companies have been neglected in favour of other export-oriented companies such as that of Japan. However, interest now appears to be rebounding in the South Korean market given low valuations. While the KOSPI has seen a temporary dive, the index has risen sharply from a level of under 2000 in March.

Additionally, what is set to bolster the index even further is a shift in policy by the Korean Exchange to double the limit of daily stock price movements to a rate of 30% from the present rate of 15%. This measure is being introduced to increase trading activity, and I anticipate that the increased trading volumes will attract investors seeking higher returns - making the index a formidable competitor to other indices in the region such as the Nikkei 225. While there have been concerns that such a measure will simply boost market volatility without increasing returns - I do not see the same as being a significant risk provided investment inflow continues to increase.

Moreover, lower interest rates coupled with uncertainty regarding a Greek debt deal has led the Korean Won to a four-week low against the US dollar. Should the won continue to weaken, then this would likely be a boon for the country's export market - we have already seen that a lower Japanese yen has coincided with the Nikkei 225 reaching record highs.

In conclusion, in spite of a short-term dip for the month of May, I continue to remain bullish on the KOSPI index and reiterate my long-term view.