Sharp Selloff Does Not Change Strategic Bullish View: Goldman Sachs Maintains KOSPI Overweight and 12,000-Point Target

Overview

This report reviews the Korean equity market's weekly performance and reassesses medium-term fundamentals after the KOSPI's sharp pullback. Although the index was weighed down by persistent volatility, foreign outflows, and selling in technology stocks, internal market breadth improved and earnings expectations continued to be revised upward. After assessing memory supply-demand, retail investor leverage, non-memory earnings, valuations, fund flows, macro indicators, and market technicals, the report concludes that current pricing reflects a degree of fundamental pessimism greater than actual risks, and the strategic bullish view remains unchanged.

Core views

First, the recent decline is more likely a sharp correction within a long-term bull market rather than the start of a trend deterioration in fundamentals. Second, AI compute investment and memory supply shortages continue to support Korean semiconductor earnings, but slowing DRAM price and export growth means the slope of earnings upgrades will moderate. Third, earnings of Korean non-memory companies are expected to grow 71% this year and 20% next year, so the upside thesis is not reliant solely on memory. Fourth, concentrated foreign selling of semiconductors has pushed foreign ownership in related sectors to about 2 standard deviations below the long-term average, which will still amplify volatility in the short term. Fifth, low valuations, expected book value and return on equity growth, and strong returns after past deep pullbacks together support the 12,000-point target.

Analysis framework

The report uses a combined top-down and bottom-up approach: it first analyzes macro variables such as exports, manufacturing PMI, and exchange rates, then uses leading indicators of earnings revisions to assess earnings momentum; it subsequently examines memory supply-demand, AI capex, non-memory earnings, and retail leverage; finally, it evaluates the KOSPI's risk-reward using P/E, P/B and ROE, foreign ownership, fund flows, risk indicators, and historical large-pullback episodes.

Methodology notes

• Earnings MomentumEarnings Revision Leading Indicator (ERLI)

  Uses macro activity and industry variables to forecast the direction and pace of future earnings expectation revisions.

  The indicator shows regional earnings momentum remains positive, but slower manufacturing expansion, DRAM price growth, and export growth may allow Korean earnings upgrades to continue while moderating in pace.

• Relative ValuationP/B-ROE Valuation Framework

  Derives a reasonable index level based on expected book value growth, return on equity, and the historical relationship between the two.

  The report believes expected book value and return on equity can support the KOSPI 12,000-point target, and notes that the Korean market still trades at a valuation discount versus global and regional Asian markets.

• Historical Scenario AnalysisPost-Large-Pullback Return Study

  Examines the KOSPI's 3-month, 6-month, and 12-month performance after historical drawdowns exceeding 30%.

  Historical samples show that most periods after deep pullbacks recorded significant positive returns, with median 3-month, 6-month, and 12-month returns of 16%, 43%, and 59%, respectively.

• Risk SentimentKorean Equity Risk Barometer

  Comprehensively measures risk appetite and market stress in the Korean equity market.

  The latest GSSRKERB Index is -1.1, still in risk-off territory, indicating that strategic opportunities coexist with short-term market stress.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• KOSPI

  The core bullish target of the report, with a strategic overweight and 12-month target of 12,000 points maintained.

  Strengths

  Low valuation, earnings expectations still being revised upward, improved market breadth, and typically stronger rebounds after historical deep pullbacks.

  Weaknesses

  The index is highly volatile, foreign investors and institutions continue to net sell, and risk sentiment remains cautious.

  Comparison

  Still trades at a valuation discount versus global and regional Asian markets.

  Risks

  Further weakening in macro activity, earnings downgrades, continued foreign outflows, or renewed technical deterioration.

• Korean semiconductor and memory sectors

  Key driver of KOSPI earnings and foreign investor fund flows.

  Strengths

  AI compute demand is driving capex, and memory supply shortages are expected to intensify in 2027 and may continue into 2028 to 2030.

  Weaknesses

  The technology sector has recently underperformed, and concentrated foreign selling has pushed semiconductor sector ownership significantly below the long-term average.

  Comparison

  Compared with other Korean industries, semiconductors are more sensitive to exports, DRAM prices, and the global AI investment cycle.

  Risks

  Slowing DRAM price growth, declining export growth, AI capex falling short of expectations, and further foreign selling.

• Korean non-memory stocks

  Used to validate that Korean earnings growth has a broader base.

  Strengths

  The report expects earnings to grow 71% this year and 20% next year, providing support for allocation beyond memory.

  Weaknesses

  Industry divergence is significant, and earnings revisions remain negative in some sectors.

  Comparison

  Compared with the memory sector, direct sensitivity to the DRAM price cycle is lower.

  Risks

  Weaker domestic demand, manufacturing slowdown, and downgrades to industry earnings forecasts.

• KRW

  Reflects risk appetite toward Korean assets, cross-border fund flows, and changes in US-Korea interest rate differentials.

  Strengths

  Appreciated 1.5% versus the USD and 1.8% versus the EUR this week.

  Weaknesses

  Depreciated 2.3% versus the JPY, and foreign equity outflows continue to pressure the exchange rate.

  Comparison

  Stronger versus the US dollar and euro, but weaker versus the Japanese yen.

  Risks

  Expanded foreign outflows, changes in US-Korea interest rate differentials, and rising global risk aversion.

• KOSPI risk reversal options strategy

  Recommended by the report to participate in potential upside while managing tail risk amid severe volatility.

  Strengths

  Can retain upside exposure while hedging part of the downside risk.

  Weaknesses

  Returns are affected by implied volatility, strike prices, and term structure.

  Comparison

  Compared with directly increasing spot positions, it is more suitable for the current environment of high volatility and weak risk indicators.

  Risks

  Rapid market reversal, changes in volatility pricing, and option time-value decay.

Key data

• KOSPI weekly performance-5.1%The report title summarizes the weekly decline as about 5%.
• Maximum drawdown from previous high-39%Calculated from the June 22 high; it had recorded an 18% rebound on July 31.
• KOSPI next-12-month EPS weekly revision+2.3%The pharmaceuticals sector saw the strongest upgrade, while the securities sector had the largest downgrade.
• KOSPI foreign investor one-week fund flow-KRW5.931 trillionNet outflows were mainly driven by selling in the technology sector.
• KOSPI individual investor one-week fund flow+KRW7.889 trillionIndividual investors absorbed part of the selling by foreign investors and institutions.
• Retail margin financing balanceFell from US$25 billion to US$19 billionEquivalent to about 0.5% of total market capitalization, indicating retail investors have reduced leverage.
• Korean non-memory company earnings growth forecast+71% this year, +20% next yearUsed to show that the earnings growth base is not entirely dependent on the memory sector.
• Korea July export growth62.8%Below the previous month's 70.7%, but above market consensus and the report's forecast.
• KRW weekly performance versus USD+1.5%The KRW appreciated 1.8% versus the EUR and depreciated 2.3% versus the JPY.
• Korean Equity Risk Barometer-1.1Still in risk-off territory.
• KOSPI 12-month target12,000 pointsThe report maintains its strategic overweight view.
• Median returns after historical deep pullbacks3 months +16%, 6 months +43%, 12 months +59%Based on KOSPI historical drawdown episodes exceeding 30% shown in the report.

Impact & implications

For medium-term investors, the report recommends maintaining an overweight in Korean equities amid volatility, prioritizing core themes and stocks rated Buy by Goldman Sachs analysts, and using risk reversal options to manage downside risk. Semiconductor memory remains the core source of earnings upside, but allocation should not be concentrated only in memory, as high earnings growth in non-memory sectors also provides diversification opportunities. Short-term positioning and entry timing still need to account for continued foreign outflows, weak risk indicators, and a slowing pace of earnings upgrades.

Risks

• Further slowdown in manufacturing PMI expansion could cause the earnings upgrade cycle to end earlier.
• Continued deceleration in DRAM prices and Korean export growth could weaken semiconductor earnings expectations.
• Continued concentrated foreign selling of technology stocks could trigger negative feedback across positioning, liquidity, and exchange rates.
• The Korean Equity Risk Barometer remains in risk-off territory, and the market may continue to experience severe volatility.
• Historical rebound patterns after pullbacks may not necessarily repeat, as the current cycle may be affected by different macro and policy conditions.
• Continued deleveraging by retail investors could weaken short-term buying support.
• AI capex or memory supply-demand may fall short of the report's expectations.

What to watch

• KOSPI foreign net flows and changes in foreign ownership of the semiconductor sector.
• KOSPI next-12-month EPS revisions and the direction of ERLI.
• DRAM price growth, memory supply-demand, and capex by AI hyperscale cloud providers.
• Korean exports, manufacturing PMI, and non-memory earnings growth.
• GSSRKERB Index, VKOSPI, and the proportion of constituents above their 200-day moving averages.
• Retail margin financing balances and whether net buying by individual investors can continue.
• USDKRW, US-Korea government bond yield spreads, and changes in Korean government bond yields.
• Whether the relative strength of construction, software, and chemicals can broaden to the wider market.