[Good Morning Stock Market] Boom Unaffected by COVID-19... Leading Stocks to Continue Rising for Now

Late-Stage Financial Market Phase... Further Gains Possible if Corporate Earnings Continue to Rebound

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The domestic stock market, which has surpassed its previous high, is analyzed to be in the final phase of the financial market cycle. Considering that individuals have established themselves as the main participants in supply and demand, it is expected that the leading stocks' upward trend will continue for the time being.

◆ Jaeseon Lee, Researcher at Hana Financial Investment= Despite the global spread of the novel coronavirus disease (COVID-19), the stock market is booming. The KOSPI and KOSDAQ indices strengthened their buying momentum last week and broke through previous highs. While there are differing forecasts on the speed of economic recovery ahead, questions arise about the potential for further gains.

Recently, I observed the current situation through the lens of Kunio Uragami's 'Four Seasons of the Stock Market.' Kunio Uragami classified the stock market into ▲Financial Market Phase (Spring) ▲Earnings Market Phase (Summer) ▲Reverse Financial Market Phase (Autumn) ▲Reverse Earnings Market Phase (Winter) using variables such as interest rates, earnings, and stock prices. Applying this framework, the current stock market is likely in late spring, that is, the final stage of the financial market phase.

The market phase from March to July resembles the characteristics of the financial market phase. Government and central bank stimulus policies have strengthened cooperation, creating a low-interest-rate environment. The abundant liquidity that follows causes the stock market to rebound. However, since there is no clear rebound in earnings improvement, valuations tend to rise. This leads to a stock market surge that might be considered overheated. Later, when transitioning to the summer phase, the earnings market phase, improvements in economic indicators and upward revisions of corporate profits justify the high valuation increases.

Currently released statistics somewhat align with these conditions. South Korea's July OECD Leading Economic Index, announced the day before, recorded 99.9, showing a gradual recovery trend since March. The operating profits of KOSPI-listed companies for 2021 and 2022 appear to have ended their downward revision trend as of the end of last month. If the economic and corporate profit trends become more evident toward the end of the year, there is potential for further gains. Historically, when KOSPI entered the earnings market phase, the average annual return ranged from 16% to 32%. Although the KOSPI index has surpassed 2380, the annual average level remains around 2050.

Meanwhile, the buying frenzy by individuals, which sparked concerns about liquidity overheating, continues. Individuals have net purchased about 36 trillion won in the KOSPI market since the beginning of the year, marking the steepest net buying since the financial crisis. However, there is still abundant market liquidity. Customer deposits approach 50 trillion won. The market capitalization to broad money supply (M2) ratio, a measure of liquidity, remains below the average level since the financial crisis.

Considering the abundant standby funds, unlike in the past, individuals are likely to establish themselves as the main supply and demand participants this year. Therefore, it is necessary to keep a close eye on sectors where individual buying strengthens. Looking at sectors with net buying by individuals since April, healthcare and software account for half. If individuals maintain their influence on supply and demand, the upward trend of existing leading stocks is unlikely to be easily broken.

◆ Hyojin Kim, Researcher at KB Securities= The leading index is expected to continue its upward trend based on low interest rates, a weak dollar, improved consumer sentiment, and the resumption of facility investment. The global leading economic index in July continued to rise after hitting a low in April. Except for some countries like Spain, all countries showed simultaneous increases in the leading index. Although additional stimulus agreements are delayed in some countries such as the U.S., and daily COVID-19 infections increase by about 250,000, major countries' interest rates remain at historically low levels, and the dollar has weakened about 7% since mid-May, supporting economic recovery and risk appetite. Based on recovery movements observed in stock prices, short- and long-term interest rate spreads, financial indicators, consumer sentiment indicators, and facility investment-related indicators, the global leading economic index will continue its upward trend.

Although the rate of increase in the leading index is expected to slow down in the future, it is anticipated to continue rising significantly compared to previous leading index upswings. The increase in the leading index in July was 0.9 points (p), down from 2.1p in May and 1.6p in June. Considering that major countries' service and manufacturing sector sentiment indices have risen above pre-COVID-19 levels, the rate of increase in the leading index is likely to slow. However, even if the rate of increase slows, it still represents a substantial rise compared to previous periods. The average monthly increase during the most recent leading index upswing from March 2016 to November 2017 was only 0.06p.

Recent recovery movements in facility investment-related indicators such as machinery and factory orders in major countries including Germany, Japan, and the U.S. are estimated to have contributed to the rise in the leading index. This indicates that recovery is spreading in facility investment-related indicators, which are important components of the leading index, in addition to financial indicators like stock prices and interest rate spreads and consumer sentiment indicators. Germany's factory orders in June and Japan's machinery orders in June increased by 37% and 31.1% month-on-month, respectively. Although there is a base effect from the sharp decline in facility investment-related indicators from March to May, it suggests that more companies are preparing to increase investment and employment in anticipation of demand recovery.

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