[Good Morning Stock Market] Focusing on Normalization After COVID-19... Seeking Differentiated Stocks Like Earnings Improvement

"Normalization Process Is Effective in Rapid Contraction Phase"
Focus on Rotation Market and Stocks with Earnings Improvement

[Asia Economy Reporter Oh Ju-yeon] As the novel coronavirus infection (COVID-19) resurges, concerns are being raised about its potential to constrain the economic recovery. Although economic contraction in August and September is inevitable, if stringent social distancing measures are not implemented long-term, it is expected that the economy can re-enter a recovery phase after October. The key factor is the spread of COVID-19. If the COVID-19 situation calms down, the domestic stock market will regain momentum, and during the month of September, amid the possibility of increased market volatility, differentiation among sectors and stocks expected to improve earnings may occur.

[Image source=Yonhap News]

◆ Lee Kyung-min, Researcher at Daishin Securities = The uncertainty caused by COVID-19 is expected to be limited to domestic demand instability. Although the global surge in COVID-19 cases continued in August, economic activities, especially in the United States, proceeded, sustaining the economic recovery. While there is concern about the speed of recovery, the normalization process from a sharp contraction phase is considered valid.

The Korean financial market is still within the influence of COVID-19. Particularly, the spread of COVID-19 is evident in the Seoul metropolitan area, which accounts for 44% of the total population and over 50% of total consumption, and social distancing has been raised to level 2.5, which stimulates short-term fundamental uncertainty. Additionally, the pressure of won depreciation remains, posing a burden on foreign investor demand. Recently, the won has weakened more than the dollar and is showing a differentiated trend compared to the yuan's strength.

Looking at a slightly longer term, if Korea escapes the influence of COVID-19 and the situation enters a calming phase, the Korean economy and financial markets are expected to show rapid resilience. Given Korea's high external dependence and export sensitivity, and the differentiated trends in domestic consumption, industrial production, and corporate activities, the stock market is expected to regain its position once COVID-19 subsides.

In the short term, caution is advised against increased volatility and chasing purchases. However, this will be an opportunity to increase weightings. COVID-19 uncertainty is a domestic variable, while external variables still show positive trends. Although the attractiveness of the Korean stock market may temporarily weaken, it is expected to be re-evaluated positively in the medium to long term for the Korean economy, industry, and stock market.

◆ Seo Sang-young, Researcher at Kiwoom Securities = Manufacturing indices in China and the United States have shown favorable results. This is positive news for Korean companies with high export dependence. In particular, the significant increase in new orders among the detailed items of the US ISM manufacturing index raises expectations for export improvement, which is favorable for investor sentiment.

However, ongoing employment instability in the US raises the possibility of a slowdown in the pace of economic recovery, lowering expectations for foreign investor demand improvement. This is due to Federal Reserve Board member Brainard's claim that permanent layoffs are increasing and the US Department of Labor's announcement that employment improvement in the US will proceed slowly, with an annual growth rate of only 0.4% over the next 10 years.

Meanwhile, differentiation based on individual stock changes has continued in the US stock market, and these factors are expected to drive the rise and fall of related stocks in the Korean market. Apple surged on reports that it will announce the iPhone 12 in October and requested manufacturers to produce 80 million units, raising expectations for changes in related stocks. US industrials also showed strength, supported by improved manufacturing indicators in China and the US, raising expectations for changes in related domestic stocks. Additionally, differentiation in sectors such as pharmaceuticals, bio, finance, utilities, and energy may increase the possibility of sectoral differentiation in the Korean stock market.

◆ Lee Kyung-soo, Researcher at Hana Financial Investment = The seasonality in September involves slight rotation (advantageous for short-term stocks with excessive price drops) and interest in stocks with earnings improvements (consensus upgrades). Interest in dividends becomes clear from October, one month later. In summary, the September market is a period when previously leading stocks with short-term excessive price drops are re-rated based on expectations for third-quarter and next-year earnings. However, what differs from the past is the steadily increasing securities customer deposits and net purchases by individuals. It has been mentioned that momentum strategies based on strong earnings are advantageous when individual funds flow in.

Considering September seasonality, although slight, the strength of the short-term excessive price drop factor was clearly observed, and in preparation for possible market volatility expansion ahead of the US presidential election, a strategy using the short-term excessive price drop factor is employed. The combination of earnings upgrades + medium to long-term stock overheating (top range of price deviation) + short-term stock neglect (bottom range of price deviation) is judged to be positive.

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