A Market More Sensitive to Negative Factors... Signs of Peak Risk Everywhere

Recognition of '2Q Peak'
Signs of 'Peak-Out' in Major Overseas Indicators
US-China Conflict Escalation Also a Burden Factor

On the afternoon of the 9th, when the KOSPI closed down 34.73 points (1.07%) at 3,217.95, dealers are seen conversing in the Hana Bank dealing room in Jung-gu, Seoul.
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The KOSPI has been fluctuating above the 3,300 level, rising for 14 months except for last October. Investors feeling the burden seem to be paying more attention to the possibility of a slowdown in upward momentum in the second half of the year rather than the strong performance expected in the second quarter.

On the 11th, Heungkuk Securities analyzed that investors are gradually reacting more sensitively to negative factors than positive ones in this atmosphere. In fact, the KOSPI rose for eight consecutive months on a monthly basis until last month. This ties the longest record since the KOSPI's inception in 1980. After the market crash caused by the COVID-19 pandemic in March last year, the KOSPI rose in 14 out of 15 months from April last year to June this year. This is the longest monthly consecutive rise record in history.

Investors cautious about the possibility of a peak in Q2

[Image source=Yonhap News]

Therefore, claims are emerging that investors are gradually feeling the burden. Samsung Electronics' second-quarter earnings announcement on the 7th is a representative example. Amid sideways stock prices since early this year, Samsung Electronics recorded an operating profit of 12.5 trillion KRW on a consolidated basis in the second quarter. This is a 53.44% increase compared to the same period last year. It also exceeded market consensus by 13.9%. Nevertheless, the stock price closed at 79,400 KRW on the 9th due to concerns about future business uncertainties.

Researcher Junho Byun of Heungkuk Securities explained, "Not only Samsung Electronics but also exports in the second quarter were so strong compared to the same period last year that corporate earnings are generally expected to meet or exceed expectations, but the market's upward momentum is weakening as the earnings season approaches. Investors seem to be paying more attention to the possibility of a slowdown in upward momentum and peak-out after the third or fourth quarter rather than the strong performance expected in the second quarter."

In fact, while the possibility of an immediate deterioration in exports is low, forecasts suggest that figures will weaken due to the disappearance of base effects and a decline in global leading indicators. Major conglomerates' earnings are likely to peak in the third quarter of this year and stagnate until the second quarter of next year. Additionally, the explanation is that the capacity to meet market expectations is weakening due to the slowdown in economic indicators' recovery and lagging cost increases caused by rising raw material prices.

Researcher Byun said, "With central banks such as the U.S. Federal Reserve (Fed) and the Bank of Korea shifting to tightening, short-term investment sentiment burdens are expected to increase in global economic sentiment and order situations. Accordingly, the KOSPI's Earnings Revision Ratio (ERR) is likely to continue a downward trend gradually after peaking at a historic high in the second quarter."

Signs of peak-out already appearing in major overseas indicators

Leading indicators of the global economy are showing clear signs of peak-out. In the case of the Manufacturing Purchasing Managers' Index (PMI), China has been gradually declining since November last year, the peak time of Pfizer's COVID-19 vaccine development. The U.S. also showed a downward trend after peaking in March. Although expectations for service sector improvement increased relatively as vaccination rates rose, the service PMI for the U.S. and China last month were 60.1 and 50.3 respectively, significantly below forecasts and the previous month. Economic sentiment is weakening in both manufacturing and service sectors.

Researcher Byun said, "Since the service PMI, which had high expectations, has dropped significantly, it is highly likely to act as a short-term burden on the stock market by lowering expectations for economic normalization. The fact that the U.S. Federal Open Market Committee (FOMC) has started discussing tapering (reducing asset purchases) is also evidence that economic stimulus momentum is ending," he diagnosed.

Greater caution needed in the domestic stock market

Since the Korean stock market has risen significantly since last year, the risk of a decline due to peak risk could be even greater. Compared to last year's low, the KOSPI has risen more than 120%, and the KOSDAQ has risen over 140%. Stock market gains in the U.S., Southeast Asia, China, and Hong Kong ranged only between 20% and 50%.

The worsening tensions between the U.S. and China this month are also a reason for caution. On the 1st, Chinese President Xi Jinping stated in a speech marking the 100th anniversary of the Communist Party's founding, "We will never tolerate any foreign forces bullying or pressuring us," adding, "Anyone who has such delusions will have their head smashed and bleed in front of the Great Wall of Steel." In response, voices criticizing China are growing in the U.S.

The conflict is spreading to financial markets as well. When Chinese authorities deleted the Chinese version of 'Uber,' Didi Chuxing's application, from domestic app stores citing security reasons, Didi Chuxing's stock price plunged about 30% over three days. Researcher Byun said, "It is necessary to pay attention to the recent sharp decline in the Hong Kong stock market amid growing concerns that China will strengthen regulations on internet companies and overseas-listed companies. Historically, when U.S.-China tensions escalate, concerns tend to be more strongly reflected in Hong Kong and South Korea," he explained.

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