KOSPI rally sparks profit taking debate as valuations rise, says CLSA

South Korea’s stock market rally has prompted investors to reassess their exposure as valuations climb to elevated levels, even as strong earnings momentum and the global technology cycle continue to support the market, according to a report by brokerage CLSA.

The report highlights that the benchmark KOSPI index has surged past the psychological 5,000 mark, a level that many investors had earlier viewed as a trigger point to reconsider allocations to Korean equities.

Korean stocks have delivered one of the strongest performances globally over the past year. Since January 2025, the market has generated a 160% total return in US dollar terms, placing it among the best-performing equity markets worldwide.

However, the sharp rally has pushed valuations to historically elevated levels. CLSA noted that Korea’s cyclically adjusted price-to-earnings (CAPE) ratio has climbed to around 24x, nearly three standard deviations above its long-term average. The market’s price-to-book ratio has also reached a record 2.1x, indicating that the long-standing “Korea discount” may have largely faded.

Another concern highlighted in the report relates to the rapid pace of investment in artificial intelligence infrastructure. Major global technology companies are expected to ramp up spending on AI data centres and related systems, with estimates suggesting that hyperscale firms could invest up to $655 billion in capital expenditure by 2026. CLSA cautioned that such aggressive investment could eventually raise questions about overcapacity, commoditisation and financing risks.

The brokerage also pointed out that Korean equities have a high correlation with US markets, particularly the technology-heavy segments. If the ongoing AI-driven rally in US equities begins to fade, Korea’s market could face spillover effects due to its strong exposure to semiconductor and tech supply chains.

Despite these risks, CLSA believes the broader outlook for Korean equities remains constructive. The country continues to benefit from its role in the global semiconductor cycle, especially as a late-cycle player in memory chips. In addition, earnings forecasts are being revised upward across multiple sectors, with Korea currently showing some of the strongest positive earnings revisions among emerging markets.

The report also notes improving domestic economic indicators. Consumer sentiment has strengthened and retail sales growth has returned to positive territory, suggesting that the domestic recovery is gaining traction.

From an investment perspective, CLSA recommends maintaining exposure but selectively focusing on export-driven companies, which have historically led Korea’s outperformance. Among its preferred stocks are SK Hynix, HD Hyundai Heavy, Semco and Amorepacific, which feature on the firm’s focus list.

Overall, the brokerage expects Korea’s equity market to remain supported by earnings growth and the global tech cycle, even as investors increasingly weigh the case for partial profit-taking after the market’s remarkable rally.