Brokerages accused of merely following market after cutting forecasts in wake of Kospi tailspin

After intense volatility saw the Kospi nose-dive below the 5,300 mark in intraday trading on Wednesday just over a month after topping 9,100, Korean brokerages that forecast the bourse to rise over 10,000 this year are cutting their targets.

This has led to criticism from within the industry and from the public that analysts are following the market lower rather than serving as a warning to investors.

Shinhan Securities lowered its Kospi target for the second half of the year to 8,800 from 11,000 on Thursday, according to industry sources on Saturday. It also cut its forecast for the upper end of the index’s third quarter range to 8,300 from 9,900.

Other brokerages have shifted their focus from setting new second half targets to assessing how far the market could fall.

DB Securities on Wednesday identified 5,500 as a possible short-term low for the Kospi. That was less than half the 11,700 target it had issued just one month earlier.

Most domestic brokerages were forecasting an annual Kospi high of more than 10,000 as recently as early July.

Brokerages have also cut target prices for individual stocks.

Mirae Asset Securities on Friday lowered its target price for Samsung Electronics to 370,000 won ($256) from 550,000 won and cut its target for SK hynix to 2.8 million won from 4.2 million won, reductions of about 33 percent.

It cited expectations of lower semiconductor contract prices and intensifying competition across the industry as Chinese chipmakers expand.

The brokerage maintained its “buy” ratings on both companies, however, saying their shares were in "oversold" territory.

The wave of reports issued after the share prices had already fallen has prompted criticism that analysts are describing market movements rather than forecasting them.

Critics say brokerages repeatedly raise their targets after stocks climb and lower them after prices fall, undermining their role in helping investors make decisions.

The relationship between brokerages and the companies they cover has also been cited as a structural constraint.

Companies are major clients of brokerages’ investment banking business, including initial public offerings and corporate bond sales, making negative forecasts or "sell" recommendations potentially damaging to future business.

“Even if an analyst maintains a buy rating, lowering the target price should effectively be understood as a 'sell' recommendation,” said a brokerage researcher who asked not to be named.

The Lee Jae Myung administration’s campaign to encourage stock investment has also put pressure on brokerages.

“When the government is telling people to sell their homes and invest in stocks, we cannot exactly throw cold water on the market by lowering target prices,” said a source at another brokerage who asked not to be named. “The reality is that we have to be mindful not only of companies but also of the government."

The optimistic bias is not unique to Korea.

The Financial Times (FT) warned last year that investors should be wary of being swayed by sensational brokerage research.

According to an FT analysis, analysts issued 53 "buy" ratings, three "hold" ratings and no "sell" ratings for Microsoft in 2024. The company’s shares later underperformed the S&P 500 by more than 10 percent.

Excessively optimistic forecasts can also work against the market.

Some brokerages predicted that SK hynix’s second quarter operating profit would approach 80 trillion won before the company reported its results.

The company posted an operating profit of 60 trillion won, disappointing investors and sending its shares down 9.61 percent on Wednesday.

BY JANG SEO-YUN [[email protected]]