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The KOSPI index is dominated by exporters and manufacturers such as LG Chemical and shipbuilder Hyundai Heavy Industries whose profitability is linked to fluctuations in external demand.
Herald van der Linde, Head of Equity Strategy, Asia-Pacific, at HSBC, added that current consensus earnings estimates appear to be overly optimistic. He downgraded Korean stocks to underweight from neutral at the end of June.
“Korean analysts are forecasting earnings per share (EPS) growth of 41.3 percent for Korean equities in 2012, which puts the market at most risk in the region for negative growth surprises,” he said.
In addition to the risk surrounding earnings, van der Linde says South Korea’s sluggish property market, weakening domestic consumption and weaker exports suggest the domestic economy could slow down more than anticipated in the second half of the year.
Exports, which account for around 50 percent of the country’s gross domestic product (GDP), rose just 1.3 percent year-on-year in June, after contracting 0.6 percent in the previous month. Concerns over the growth slowdown prompted the Bank of Korea earlier this month to reduce its 2012 growth forecast for the second time this year, and cut interest rates by 25 basis points.
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