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Warren Buffett’s favorite market indicator suggests Korean stocks may be overvalued

An electronics board shows Kospi continuing its rally during Monday morning trading at Hana Bank‘s dealing room in Seoul. (Yonhap)
An electronics board shows Kospi continuing its rally during Monday morning trading at Hana Bank‘s dealing room in Seoul. (Yonhap)
While South Korea’s benchmark index hit an all-time record of 2,633.45 on Friday, a global market gauge also reached a new high, suggesting the country’s stock market may be overvalued.

The Buffett indicator -- US investor Warren Buffett’s preferred market indicator -- marked 112.7 percent as of Friday, according to data from the Bank of Korea and Korea Exchange on Monday.

The indicator is calculated by dividing combined listed stocks’ market capitalization by the country’s quarterly gross domestic product data from the third quarter last year to second quarter this year. Investors use the indicator as a rough gauge of the stock market’s valuation to the size of the economy.

Market watchers have raised alarm over the valuations of local indexes, citing the Buffett indicator. Generally, a value below 80 percent is taken as meaning a market is undervalued, but one above 100 percent suggests it is overvalued.

Some analysts, including Ahn So-eun at IBK Investment & Securities, saw the current combined market cap of both the main Kospi and tech-heavy Kosdaq as burdensome compared to past trends. Since the market has been fueled by hopes of large-scale policies and an economic recovery, it could slump if the factors driving the gains cannot be realized.

“The high ratio of market value to GDP indicates a wider gap between fundamentals and stocks in a long-term perspective. The market has likely included hopes for commercializing a COVID-19 vaccine, the US administration under President-elect Joe Biden and the Korean New Deal program,” Ahn said.

But other experts said the Buffett indicator was just one of several metrics used to evaluate indexes. They suggested not attaching too great a meaning to the reading at the moment, pointing out that the US stock market’s reading stands at about 170 percent, nearing a new high earlier this month.

“Other global stock markets’ Buffett indicator results showed they were much higher than us (Korea). We don’t need to enforce a stricter yardstick only to the local market,” said Kim Yong-koo, an analyst at Samsung Securities.

By Jie Ye-eun (yeeun@heraldcorp.com)
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