Investment Points in the Chain Reaction of Inflation: 'Profit Margin'

[Asia Economy Reporter Hwang Junho] As inflation indicators in the US and China rose above market expectations, an analysis suggested focusing on high-profit-margin stocks.

Lee Jaeman, a strategist at Hana Financial Investment, said on the 18th, "The stock market may be concerned not just about the apparent phenomenon of rising inflationary pressure, but about the decline in margins (=operating profit margins) that can occur when production costs rise faster than selling prices." He added, "Currently, during the phase of falling US 10-year Treasury yields and rising consumer prices, the monthly average returns and probability of increase for the S&P 500 index and KOSPI are lower than usual."

Currently, inflation indicators are on the rise. The June year-on-year increase in China's producer prices met high expectations, mainly due to rising raw material prices. The US consumer price increase also exceeded expectations, driven by rising housing prices. The correlation between the two indices remains very high at 0.8. While prices are rising, the US 10-year Treasury yield is showing a downward trend.

Lee said, "In this situation, it is necessary to keep in mind that preference for companies with consistently high operating profit margins may increase," explaining, "During periods of falling US 10-year Treasury yields and rising consumer prices, the S&P 500 High Quality index showed relatively higher monthly average returns and probabilities of increase."

He continued, "Applying these criteria to domestic companies, there should be not only annual and semi-annual sales growth this year but also an increase in market share within the industry," adding, "It is necessary to expand interest in companies that historically showed significant average improvements in operating profit margins and had at least a 60% probability of improvement when sales increased."

Based on these criteria, he recommended Samsung Electronics and SK Hynix in the semiconductor sector; LG Household & Health Care and Coway in the cosmetics/apparel sector; and Samsung Electro-Mechanics and LG Innotek in the IT hardware sector as suggested stocks.

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