[Good Morning Stock Market] "Leading Stocks' Upward Momentum to Slow... Attention Needed on Oversold Stocks"

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] In the new year stock market, it is forecasted that the upward momentum of the existing leading stocks centered on IT, which had deepened the sectoral return gap last month, will relatively slow down. From a strategic response perspective, attention should be paid to oversold stocks in sectors such as materials.

◆Seokhyun Park, Researcher at KTB Investment & Securities=At the beginning of the year, the stock market is expected to focus more on improvements in economic fundamentals and positive changes in corporate earnings forecasts rather than policy variables. Although the additional upward momentum of the KOSPI, which rose more than 5% last month, will slow down, a gradual rise is expected to continue, making a recovery to 2250 points possible.

By sector, the upward momentum of existing leading stocks centered on IT (semiconductors, IT hardware, healthcare, software) is expected to relatively slow down, but they are not expected to step down from their leading role. In terms of interest in neglected stocks, a selective process for oversold stocks may take place. From a strategic response perspective, the oversold stocks to watch are in the materials sector. The possibility of maintaining a strong yuan, the strength of the CRB metal index, and the rebound in Chinese producer prices linked to this could trigger an increase. However, it is necessary to concurrently verify improvements in earnings forecasts.

From the perspective of economic fundamentals, the focus is more on the domestic side than overseas. Korea's export growth rate is expected to turn positive in the first quarter following a reduction in the negative rate in December. The improvement in cyclical economic indicators is clearly reflected in the movement of the leading economic index. According to Statistics Korea, the cyclical component of the leading economic index for November increased by 0.4% compared to the previous month, marking the highest rise since June 2013 and continuing a three-month consecutive increase for the first time in two years and four months. Typically, a three-month consecutive rise in the cyclical component of the leading economic index is recognized as a benchmark for a phase transition, which is interpreted as a confirmation signal that the domestic economic cycle has passed its bottom.

Advanced economies show a characteristic where the weakness in manufacturing is offset by the robustness of consumer spending. This is confirmed in both the U.S. and Europe, albeit to varying degrees. The central banks' continued low-interest-rate policy and the resulting strong consumer spending form the foundation that prevents advanced economies from deviating from stable growth.

The earnings indicator closely linked to the KOSPI historically is the 12-month forward operating profit forecast change. In the last week of December, the 12-month forward operating profit increased by 1.6% compared to four weeks earlier, marking the 16th consecutive week of increase. The KOSPI's four-month consecutive rise reflects this positive change in earnings forecasts. The improvement in earnings forecasts can be the foundation for maintaining the KOSPI's upward trend.

The handicap is that the improvement in earnings forecasts is concentrated in some sectors, mainly semiconductors, which strengthens the characteristic of semiconductor-centered rises within the market. The key going forward will be whether this issue can be resolved. Whether the improvement in earnings forecasts can expand to other sectors will likely require further spread of the global economic recovery.

◆Soyeon Park, Researcher at Korea Investment & Securities=Many of the anticipated positive factors have largely materialized. The U.S.-China trade agreement is only awaiting official signing, and the leading economic index has rebounded strongly. However, corporate earnings are still improving slowly. The 12-month forward price-to-earnings ratio (PER) level of 11 times, which has played a role as the upper limit of the index, currently corresponds to only around 2150 points. Major large-cap stocks such as Samsung Electronics, SK Hynix, and Naver have reached levels close to their 2018 peaks, necessitating a pause for breath.

On the other hand, liquidity is more abundant than ever. The total assets of the U.S. Federal Reserve increased from $3.7 trillion at the end of August to $4.1 trillion at the end of December, growing by $95 billion monthly. Monthly purchases of $60 billion in government bonds and open market operations to stabilize the repo market are driving positive carry in emerging markets. The Bank of Korea also announced it will maintain an accommodative stance in its monetary and credit policy operations this year and expand the scale of simple purchases of government bonds. The People's Bank of China is also expected to cut the reserve requirement ratio soon. A strategy focused on small and mid-cap stocks sensitive to liquidity variables is recommended. The expected KOSPI range for January is 2120 to 2250 points, with Korea Investment & Securities universe 12-month forward PER between 10.29 and 10.92 times, and 12-month forward PBR between 0.84 and 0.89 times.

This content was produced with the assistance of AI translation services.