[Good Morning Stock Market] "Kospi, Different Fundamentals from 2018... Possibility of New Record Highs↑"

[Asia Economy Reporter Eunmo Koo] The KOSPI is on the verge of surpassing its all-time high of 2598.19 points recorded on January 29, 2018, after reaching a new yearly peak on the 16th. While a short-term correction cannot be ruled out given the continuous rise, the possibility of hitting a new high within the year is higher than ever. Notably, unlike in 2018 when large IT sectors such as Samsung Electronics and SK Hynix led the market rally, the recent rally is characterized by a lack of concentration in any specific sector, which is an important point to consider.

◆Jaeseon Lee, Researcher at Hana Financial Investment=The KOSPI broke through again the previous day. The KOSPI 200 index (340.63 points) reached a historic high, driven by the strong performance of large-cap stocks due to foreign passive fund inflows. Of course, since the index has been rising continuously, a short-term correction in the KOSPI may occur. The RSI indicator has again reached the overbought signal level of 75 points. However, it is also time to consider the possibility of the KOSPI setting a new high within the year. It is necessary to examine the improved fundamentals and macro environment compared to 2018 when the KOSPI last recorded a peak.

At the end of January 2018, when the KOSPI formed its previous high, the market capitalization was similar to the current level, surpassing 1600 trillion KRW. However, the rise in the KOSPI level was solely driven by large IT sectors. In fact, from 2016 to January 2018, the market capitalization of Samsung Electronics and SK Hynix increased by 84%, while the market capitalization of the rest of the KOSPI increased by only 24%. The profits showed a similar pattern. The semiconductor and IT hardware sectors accounted for nearly 40% of the KOSPI’s operating profits, whereas the operating profit share of other cyclical sectors such as automobiles and chemicals fell to 9%. In this context, the prolonged US-China trade dispute and the Federal Reserve’s interest rate hikes emerged as major variables starting in the second half of 2018. Consequently, earnings forecasts for IT companies, which had been optimistic, were rapidly revised downward.

At that time, the gap between actual and forecasted operating profits for Samsung Electronics and SK Hynix expanded to the largest level since the financial crisis (-3.1 trillion KRW). As a result, the KOSPI’s operating profit in 2018 increased by only 1.9% year-on-year, but excluding Samsung Electronics and SK Hynix, the KOSPI’s operating profit declined by 6.8%. This was directly reflected in returns. The KOSPI’s average annual return in 2018 was -17.3%.

Currently, the KOSPI’s rise is structurally different. The index’s increase is evolving into a form that is not concentrated in specific sectors. Unlike in 2018, the market capitalization growth of the KOSPI excluding Samsung Electronics and SK Hynix has been faster. Growth companies such as secondary batteries and software, as well as traditional heavy industries like automobiles and chemicals, drove the stock market rise with positive outlooks in 2021. The operating profit share of automobiles and chemicals within the KOSPI expanded to 13% in 2021 and is expected to increase alongside semiconductors and IT hardware.

For Asian export countries, the macro environment is also expected to be favorable next year. Last week, the government finalized the signing of the Regional Comprehensive Economic Partnership (RCEP). RCEP is the world’s largest free trade agreement (FTA), consisting of ASEAN countries with high potential growth rates, including China, South Korea’s largest export market. The increased trade volume is likely to benefit exports and be a positive factor for cyclical industries. The government expects RCEP to be officially implemented as early as the first half of next year.

◆Sangyoung Seo, Researcher at Kiwoom Securities=The Korean stock market surged the previous day, with the KOSPI 200 index hitting an all-time high, led by large-cap stocks. It is estimated that the global economy’s shift from developed countries to emerging markets after the US presidential election, and among emerging markets, the inflow of funds into East Asian countries including Korea?where the current account balance is solid and COVID-19 damage is relatively low?had a positive impact. In fact, foreign demand for Korean stocks began to increase significantly after the election, and related companies led the rise. This is presumed to be due to expectations for the Biden administration’s free trade policies and improved import demand resulting from the spread of COVID-19 mainly in the US and Europe.

Meanwhile, the ongoing optimism about vaccines is expected to positively influence the Korean stock market. Additionally, comments by Fed Vice Chair Clarida, who emphasized the importance of asset purchases amid the resurgence of COVID-19 and hinted at more support at the December Federal Open Market Committee (FOMC) meeting, are also positive. However, attention should be paid to profit-taking following the sharp rise the previous day. In the US stock market, sectors expected to benefit from increased earnings due to vaccine optimism saw larger gains, while sectors on the opposite side experienced larger declines. Considering this, some technology stocks, whose earnings growth rates are expected to slow as normalization occurs, are likely to face selling pressure.

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