[Good Morning Stock Market] Leading Stocks Continue Strong... Possibility of Short-Term Speed Adjustment

Uncertain Outlook for US Economic Recovery
Focus on China's National Indicator Announcements

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The trend of leading stocks showing strength is appearing both domestically and internationally. While leading sectors such as Untact (contactless) and bio have ample long-term potential for further gains, there is an analysis that short-term volatility may increase due to the burden of a sharp rise in price-to-earnings ratio (PER) and a shift to foreign selling.

◆ Bongju Kang, Meritz Securities Researcher = There is a possibility of a widening return gap between leading stocks and neglected stocks. The existing leading stocks are growth stocks in software, gaming, semiconductors, IT hardware, pharmaceuticals, and bio sectors. Among these, software, gaming, pharmaceuticals, and bio sectors have seen accelerated stock price strength and PER increases following the COVID-19 phase, driven by deepening low interest rates, acceleration of Untact and platform economy, and expectations for new drug development. The seven leading stocks presented in February (Samsung Electronics, SK Hynix, NAVER, Kakao, NCSoft, Samsung SDI, Samsung Electro-Mechanics) have continued to outperform the KOSPI.

Ultra-low interest rate liquidity and expectations for acceleration of the digital and platform economy have manifested as PER increases in global stock markets. Both Korea and the U.S. require evaluation based on 18-month forward earnings PER rather than 12-month forward earnings PER to explain current stock price levels. In particular, the U.S. 12-month forward PER is 22 times, comparable to the late 1990s dot-com bubble level. This can be interpreted in two ways. First, abundant liquidity reflects optimistic growth expectations, which is positive. On the other hand, if expectations get excessively ahead or quarterly earnings temporarily disappoint, the risk of short-term stock price declines may increase.

Compared to the historical median PER of 16.4 times at the peak of previous leading stock rallies, current leading stocks have the lowest PER at NCSoft with 21 times, Hite Jinro at 27 times, NAVER and Kakao at 45 and 70 times respectively. Samsung Biologics reaches as high as 168 times. Of course, comparing the growth potential and sector penetration possibilities of the current leading sectors?platform economy and pharmaceuticals?with traditional cyclical stocks of the past is unreasonable.

Considering the current ultra-low interest rate environment and the intangible assets held by leading stocks (brand value, platform scalability, customer control, potential new drug development capabilities, etc.), there is an argument that current leading stock prices are not high. Nevertheless, given that the stock market has not sufficiently publicized a consensus methodology for valuing intangible assets and that stocks with PERs above 50 times have historically shown high volatility, it is judged that at least in the short term, there is a higher possibility of some correction (around 10-20%) in current leading stocks.

Another concern is the inconsistency in foreign investors’ buying persistence. Among the current five leading stocks, except for Kakao, foreign investors have shifted to selling since June. It is also important to note that short-term price corrections frequently occurred before and after earnings announcements following rapid short-term price surges in past growth stocks.

◆ Sangyoung Seo, Kiwoom Securities Researcher = The U.S. stock market started higher, buoyed by positive news related to COVID-19 vaccines from companies like Moderna and AstraZeneca. However, volatility increased as large tech stocks underperformed and tensions between the U.S. and China intensified due to strengthened regulations on Huawei, leading to mixed trading. The market rebounded in the afternoon after Trump announced that additional sanctions on senior Chinese officials were excluded. Meanwhile, the Federal Reserve limited gains by stating in the Beige Book that economic outlook remains uncertain (Dow +0.85%, Nasdaq +0.59%, S&P 500 +0.91%, Russell 2000 +3.50%).

Credit rating agency S&P announced that the number of credit rating downgrades for U.S. companies in Q2 reached a record high of 414 cases. Ultimately, as Fed Chair Powell pointed out, the spread of credit risk among individual companies due to COVID-19 is also a burden. In this context, attention should be paid to China’s Q2 GDP growth rate, industrial production, retail sales, and fixed asset investment, which will be announced at 11 a.m. Korean time. All are expected to exceed previous announcements, likely having a favorable impact on investor sentiment. The Korean stock market is expected to show changes depending on these results.

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