Is it a highly appreciated value stock or an overly fallen growth stock? "Let's look at the most attractive sectors based on PBR"

[Asia Economy Reporter Lee Seon-ae] Who will be the next leading stock? There is a clash between the 'growth stock trend theory,' which predicts that growth stocks will lead the next bull market, and the 'value stock trend theory,' which argues that value stocks, having risen relatively more during the economic recovery phase, remain more attractive. Securities experts' forecasts also diverge, suggesting that careful portfolio construction will be necessary.

According to the financial investment industry on the 24th, the U.S. Consumer Price Index (CPI) announced on the 12th (local time) surged 4.2% compared to a year ago, marking the highest level in 13 years and raising inflation concerns. As market caution increases, volatility is also expanding.

The securities industry agrees that the stock market's direction will follow an upward curve. Seongcheol Lim, a researcher at Heungkuk Securities, said, "Inflation and interest rate hikes supported by economic recovery may trigger short-term concerns, but they have acted as positive factors for the stock market in the long term," emphasizing, "It is important to note that during periods of rising interest rates in the recovery phase, the market rose despite several corrections."

Since 2001, over about 20 years, during 15 significant interest rate hike periods, the average return of the KOSPI was 18.6%, with an 80% probability of increase. Assuming interest rates continue to rise, the stock market direction is expected to ultimately move upward.

Typically, during inflationary periods, value stocks such as cyclical stocks rise, while growth stocks, sensitive to discount rates, tend to fall. This raises the dilemma of whether to buy value stocks that have already risen significantly or growth stocks that have fallen sharply. Forecasts differ on this point.

Those supporting value stocks emphasize that value stocks are more attractive than growth stocks. Researcher Lim said, "Looking back at the Korean market interest rate hike periods in 2001, 2003, 2005, 2007, 2009, 2013, and 2017, value stocks recorded better returns compared to growth stocks," explaining, "Over the past 20 years, during interest rate hike periods, the average return and probability of increase for value stocks were 20.7% and 80.0%, respectively, outperforming growth stocks at 15.4% and 73.3%." He added, "Earnings also favor value stocks," noting, "Based on operating profit, the expected year-over-year growth rates for value and growth stocks are 57.7% and 49.6%, respectively, and the 2021 earnings consensus changes also show value stocks outperforming growth stocks."

However, there are valuation concerns for value stocks, as they have risen significantly following the economic recovery phase. Therefore, proponents of the value stock trend recommend focusing on sectors undervalued relative to their price-to-book ratio (PBR) if valuation burdens are a concern.

Jaeman Lee, a researcher at Hana Financial Investment, emphasized, "As of 2021, the PBRs of the petroleum, chemical, steel, construction, machinery, and shipbuilding sectors exceed or are close to the levels seen when the U.S. 10-year Treasury yield rose to 3% in 2013," adding, "Among them, the banking sector is the most attractive investment-wise based on PBR (2013 peak PBR was 0.61x, currently 0.42x)."

The growth stock trend theory stresses that now is the time to buy and that growth stocks will reclaim their position as the next leading stocks. Currently, growth stocks such as semiconductors and secondary batteries are sluggish. The KRX Semiconductor Index, which rose to 4138.65 on April 26, fell to the 3700 level in May and recorded 3801.24 on the 21st. During this period, Samsung Electronics fell below 80,000 KRW, becoming a '70,000 KRW stock.' The KRX Secondary Battery K-New Deal Index, which recorded 6090.06 on April 16, dropped to 5841.78 on the 21st. As a result, the excessive decline has created valuation appeal, such as a lower price-to-earnings ratio (PER). Kyungsoo Lee, head of research at Meritz Securities, emphasized, "Growth stocks will return to an upward trend after a short-term volatility process during the interest rate hike phase."

Seonghoon Seo, a researcher at Samsung Securities, also forecasted, "Considering that further financial easing is unlikely, investors' attention will inevitably focus on earnings and price merits. Therefore, attention should be paid to sectors such as automobiles, IT, and healthcare, which have experienced deep foreign selling and prolonged price adjustments."

Jaehwan Heo, a researcher at Eugene Investment & Securities, said, "The discussion of tapering (quantitative easing reduction) means that growth and inflation are favorable to the economy, so it is difficult to say that the cyclical (ru-cyclical) phase has ended," adding, "Surprisingly, interest in growth stocks is expected to be necessary again at the time of tapering announcement and implementation." Seungyoung Park, a researcher at Hanwha Investment & Securities, emphasized, "The rotation period from large growth stocks to cyclical stocks is valid until around the global economy's cyclical peak. Once the cyclical recovery ends and the financial market's sensitivity to inflation decreases, the stock market will refocus on structural growth."

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