Forget the Boring KOSPI... Q2 Rebound and Upward Signals Detected

Economic Recovery and Corporate Profit Growth Drive 'Strong Rebound Signal'
EPS Rise Improves KOSPI Valuation, "3500 Also Expected"

[Asia Economy Reporter Lee Seon-ae] The KOSPI is expected to enter a bullish phase in the second quarter, equipped with strong fundamentals. As momentum such as economic and corporate profit growth, which outweighs the risks of rising inflation and interest rates in the global market, flows in, the upward momentum of the KOSPI in the second quarter is anticipated to be stronger than expected.

On the 29th, securities firms released consecutive forecasts that the domestic stock market will see the KOSPI successfully rebound in the second quarter and continue its upward trend into the second half of the year. The main reason for the rebound is that the rapid rise in interest rates, which was the primary cause of the first quarter correction, has calmed down, and the earnings estimates for Korean companies have increased, easing valuation (price-to-earnings ratio) pressure. Signs of foreign investors switching to net buying are also supporting this trend. Additionally, the global market is expected to experience overwhelming economic growth that can escape the influence of inflation and interest rates, which is another positive factor.

◆Easing Interest Rate Shock and Global Economic Recovery= Securities firms expect the shockwave from the rapid rise in interest rates to weaken gradually. Looking at the long-term policy interest rate outlook of the U.S. Federal Reserve (Fed), it is analyzed that the short-term interest rate is nearing its upper limit. Kim Yong-gu, a researcher at Samsung Securities, explained, "The long-term policy interest rate was about 2.5% per annum as of March, and the upper limit of the 30-year maturity moves along with the policy rate. Considering that the average difference between the 30-year and 10-year government bonds is 0.63 percentage points, the short-term upper limit of the 10-year maturity interest rate is 1.86% per annum."

In this context, the global economic recovery is accelerating. Lee Kyung-min, a researcher at Daishin Securities, said, "The GDP growth rate in the second quarter is expected to reach 11.5% in the U.S., 13.1% in the Eurozone, 9.01% in the G10, and 12.01% in Asia. In this case, the rise in inflation and interest rates will form a virtuous cycle with economic recovery and growth, adding upward momentum to global stock markets," adding, "Industries leading global economic recovery and corporate profit growth, as well as cyclical and financial stocks sensitive to inflation expectations, will rise together."

Accordingly, a recovery in trade is also expected. In the process of simultaneously solving the challenges of demand recovery and normalization of consumption and inventory, major advanced countries including the U.S. will compensate for the supply shortage through imports (exports from the perspective of the counterpart countries), which is a positive factor for the Korean economy, industry, and financial markets that have high external dependence and a high export ratio. The researcher emphasized, "The simultaneous improvement of global consumption and manufacturing industries, including the U.S., is highly likely to lead to a surprise momentum in global trade and Korean exports," and added, "This change in the global macro environment is a variable that increases trust in Korean corporate profits."

Moreover, there is a very high correlation between Korean export momentum and the sales growth rate of KOSPI companies. If exports improve faster than expected and the improvement range expands, it is possible to expect an upward revision of earnings expectations for Korean companies along with stronger-than-expected earnings momentum. In fact, Korea's earnings per share (EPS) growth rate in 2021 reached 54%. Jo Ik-jae, a senior advisor at Hi Investment & Securities, predicted, "From the second quarter, EPS, which has risen less so far, will increase, leading to a rapid improvement in KOSPI valuation," and added, "Based on this, the KOSPI could rise to 3,500."

◆KOSPI Earnings at an All-Time High= According to FnGuide, the operating profit and net profit forecasts for KOSPI companies this year have exceeded 185 trillion won and 130 trillion won, respectively, as of now. Corporate profits on the KOSPI have already surpassed historical highs and are continuously setting new records. This is due to the visible economic recovery and business improvement combined with inflation expectations. The speed of upward revisions in operating profit forecasts is accelerating. This indicates that both the performance level and momentum have entered a new phase. The researcher emphasized, "After the first quarter earnings season this year, upward revisions to annual earnings forecasts are possible," adding, "While the KOSPI suffered from volatility and downward pressure in the first quarter, its downside rigidity has strengthened, and the medium- to long-term upward trend has rather been reinforced."

However, some fluctuations are inevitable in the second quarter as well. Lee Eun-taek, a researcher at KB Securities, said, "In the history of the Korean stock market, strong long-term bull markets appeared twice, from 1986 to 1989 and from 2003 to 2007, and in both cases, there was a decline of more than 15% over four months before rising," and predicted, "After continuing corrections until mid-second quarter, a strong bull market could be reproduced based on the effects of stimulus measures from various countries."

During corrections, a 'buy' strategy rather than 'sell' was recommended. Researcher Kim said, "The Korean manufacturing profit leading proxy, calculated by applying detailed indicators of the Bank of Korea's Business Survey Index (BSI), predicts the trend growth potential of corporate earnings fundamentals," and added, "As internal confidence in earnings grows, resilience to external inflation and interest rate volatility and the market's downside rigidity will proportionally strengthen." He continued, "In fact, the monthly average index path of the KOSPI converges with the trend of changes in the KOSPI operating profit consensus," and advised, "If the second quarter market fluctuations are limited to corrections within a bull market, the investment strategy should focus on holding rather than panic selling, and buying rather than waiting."

Foreign investor demand is also expected to improve. Kim Da-mi, a researcher at Shinhan Financial Investment, explained, "With some psychological factors such as concerns about monetary policy normalization and government bond supply and demand easing, and the reduction of economic differentiation between the U.S. and other countries, a cyclical dollar weakening is expected in the second quarter," and added, "As economic normalization continues to improve fundamentals and relative valuation and the pace of dollar appreciation are adjusted, foreign selling pressure is expected to gradually ease."

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