Kospi Index can jump 40%, Goldman forecasts, as key risks remain

South Korea’s Kospi Index continued its remarkable bull run this week, hitting another record high on Wednesday. It jumped to 8,900 KRW, bringing its 12-month gains to 220%, solidifying its status as the world’s best-performing stock market.

Goldman Sachs sees Kospi Index jumping 40%

The Kospi Composite Index has been in a strong bull run this year, helped by the ongoing exuberance among South Koreans and the AI boom. This rally has brought Samsung’s and SK Hynix’s market capitalizations to over $1 trillion. Combined, the two companies are worth more than the South Korean economy.

Analysts at Goldman Sachs believe that the Kospi Composite Index has more upside going forward. Precisely, they expect that it will jump by 40% and hit the crucial resistance level of 12,000 KRW. The analyst said:

“We lean into North Asia where earnings growth is strongest. The AI boom will continue in the foreseeable future as evidenced by the planned spending by the top American hyperscalers.”

The analysts believe that the index has the momentum it needs to continue accelerating. Also, they expect that more foreign investors will continue to take advantage of the ongoing rally and the weak South Korean won to invest in the country.

South Korean stocks face substantial risks

Still, despite the ongoing optimism among analysts at Goldman Sachs, the reality is that the Kospi Index faces fundamental and technical risks. The first fundamental risk is that the rally has been driven by two main companies that are in the same industry. 

Samsung and SK Hynix have jumped because of the extended AI boom that has pushed demand and prices higher. The risk here is that these companies will reverse once the AI boom starts to fade. 

At the same time, there are concerns that these companies have become highly overvalued. Samsung and SK Hynix trades at 30 and 35 forward earnings multiples, which is much higher than their historical levels.

Third,  there are signs that foreigners are dumping South Korean shares. They dumped shares worth over 6.5 trillion won in the past few months as they now start to book profits. 

Kospi Composite is overbought and may face mean reversion

Kospi Index chart | Source: TradingView

Technicals are also sending a red alert about the ongoing Kospi Index rally. The daily chart shows that the Relative Strength Index (RSI) has jumped to the extremely overbought level of 76, its highest point since May. While an asset can remain at an overbought level for months, it is common for it to retreat as investors start to book profits.

The other risk is that the Kospi Index trades much higher than its historical averages. The 100-day moving average stands at 6,157 KRW, much lower than the current price of 8,800 KRW. This means that the index may go through a mean reversion phase. 

Finally, the index remains in the markup phase of the Wyckoff Theory, which is usually followed by distribution and then markdown. The ongoing selling by foreign investors is a sign that the distribution phase is nearing. 

Therefore, the most likely Kospi Index forecast is moderately bullish, with the next key target being 10,000 KRW. In the long term, there are chances that the index will suffer a strong reversal because of these mentioned risks.

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