[Good Morning Stock Market] May Requires Stock-Specific Strategies

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] Although foreign demand continues, there are opinions that stocks with downgraded earnings forecasts may face corrections. Short selling could also have a significant impact on individual stocks, making stock-specific responses necessary starting this May.

◆ Min Tae-il, Researcher at Korea Investment & Securities = There is a saying in overseas financial markets: "Sell in May." This is because the average returns of most countries' stock markets from May to September are generally lower than those from January to April. However, this year, the likelihood of returns falling in May is low. Unlike in the past, the foreign ownership ratio of the KOSPI decreased from January to April, and foreign buying has been strong this month. Moreover, earnings upgrades are occurring faster than index gains. Considering the KOSPI's expected earnings, which are being revised upward more steeply than the index rise, the KOSPI is actually showing signs of being relatively undervalued. In fact, the KOSPI's 12-month forward price-to-earnings ratio (PER) gradually declined from January to April despite the index rising. The 12-month forward PER was 13.5 in January but dropped to 13 in April.

However, stock-specific responses will be necessary starting this May. Looking at the May returns of KOSPI stocks over the past 10 years, stocks that saw an increase in foreign ownership from January to April but did not have supporting upward earnings revisions during the same period performed poorly. Therefore, it is necessary to closely monitor stocks where foreign ownership has increased due to net foreign buying but earnings forecasts have not been revised upward.

(Provided by Korea Investment & Securities)

Starting from the 3rd, short selling will resume only for KOSPI 200 and KOSDAQ 150 stocks. While this will not significantly affect the KOSPI index, it could have a meaningful impact on individual stocks. The increasing scale of loan balances this month proves that the market's capacity for short selling is expanding. Additionally, the short selling balance ratio, which is significantly lower than before the short selling ban, is a factor that reduces the short selling burden on overvalued stocks for investors. Therefore, it is necessary to closely watch stocks that had a high short selling balance ratio but have seen a significant decrease compared to pre-ban levels and whose loan balances have recently increased.

◆ Jo Yong-gu, Researcher at Shin Young Securities = Recently, after the Federal Open Market Committee (FOMC) meeting, Jerome Powell, Chair of the U.S. Federal Reserve (Fed), mentioned that the U.S. economy is still far from the Fed's goals and that it will take more time to make further progress. He also reaffirmed that although the economy is improving, inflationary pressures are likely temporary due to base effects and supply bottlenecks, and that now is not the time to discuss tapering (asset purchase reduction).

Monetary policy was maintained. There were no changes to the benchmark interest rate or asset purchase policies. The plan to maintain zero interest rates until the labor market reaches full employment and inflation rises to 2% remains unchanged. It was also reconfirmed that the Fed is prepared to appropriately adjust its monetary policy stance if risks arise that delay achieving these goals.

However, he hinted at the start of tapering discussions in the future. He acknowledged that some asset prices are high and that there are bubbles in asset markets. He also stated that if inflation persistently exceeds 2%, tools will be used to reduce inflation and inflation expectations. This is seen as the first step toward future tapering discussions.

◆ Moon Nam-jung, Researcher at Daishin Securities = May is a period when expectations for fundamentals can rise significantly. There is a high likelihood that the stagnant stock market in late April will be revitalized. Focus is on improvements in the U.S. labor market and China's exports and consumption, turning the rapid economic recovery expectations after vaccine distribution into confidence. This represents a change in the perspective on economic recovery.

The U.S. nonfarm payrolls for April are expected to increase by 888,000 compared to the previous month, and the unemployment rate is forecast to drop from 6.0% last month to 5.8%. Despite the spread of COVID-19, vaccine distribution is confirmed to be positively contributing to economic normalization and labor market recovery. This is expected to dismiss views that the stock market correction is due to seasonal COVID-19 spread.

(Provided by Daishin Securities)

China's April Caixin Manufacturing Purchasing Managers' Index (PMI), announced on this day, continued the expansion trend by exceeding last month's 50.6% with 50.9%. Since the first quarter GDP announcement this year, continuous improvements in indicators are following, raising interest in the recovery of China's economic value. The April Services PMI, to be announced on the 7th of next month, is also likely to raise expectations for consumption improvement, suggesting that an environment supporting balanced growth through export and consumption improvements is being established.

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