KOSPI Operating Profit Growth Rate Slows... Opportunities in Sectors Without Returning Foreign Net Buying

[Asia Economy Reporter Lee Seon-ae] The consensus forecast for operating profit growth of KOSPI-listed companies in 2022 has shown a slowdown for four consecutive months, sounding a warning about a 'weakening profit momentum.' As the domestic stock market heads into the second half of the year, the influence of next year's operating profit forecasts on stock prices is inevitably increasing compared to this year's forecasts for KOSPI-listed companies, making it necessary to pay close attention to this slowdown trend.

According to the financial investment industry on the 27th, the consensus forecast for KOSPI operating profit growth in 2022 peaked at +20.2% at the end of March and has been slowing for four months, standing at +11.9% as of the fourth week of July. Excluding the semiconductor sector, it peaked at +13.3% at the end of March and dropped to +7.3% as of July. Park Seok-hyun, a researcher at KTB Investment & Securities, said, "Since the profit forecast changes have not reversed into downward revisions and the outlook for corporate profit growth next year itself has not changed, there is no need to hastily adopt a pessimistic view." However, he emphasized, "It is necessary to be cautious that if the return to a positive trend centered on the 2022 profit forecast is delayed, the weakening of profit momentum could persist."

In the second half of the year, the influence of next year's corporate profit forecasts on stock prices is expected to gradually increase compared to this year's forecasts in the domestic stock market. KOSPI-listed companies have continued to deliver earnings surprises in the second quarter following the first quarter. Although not as large as the big surprise in the first quarter, the second quarter KOSPI operating profit is also expected to exceed forecasts. Furthermore, the outlook for third-quarter operating profits remains positive, raising expectations for record quarterly highs in the upcoming earnings season. Accordingly, the 2021 KOSPI operating profit forecast has been continuously revised upward and currently stands at 225 trillion KRW. In contrast, the 2022 KOSPI operating profit forecast has plateaued at 250 trillion KRW with limited further upward revisions. Notably, the 2022 forecast for the semiconductor sector?which accounts for a significant portion of profits (28.9% of total KOSPI operating profit in 2021 and 31.8% in 2022)?has clearly stagnated.

This slowdown in profit growth forecasts has also hindered the return of foreign investors. Foreigners net sold 8.6 trillion KRW in the first quarter and 8.9 trillion KRW in the second quarter of this year. As of July in the third quarter, net sales by foreigners have reached 3.4 trillion KRW. With the return of foreign investors' demand-driving power still delayed, the possibility of strengthening the KOSPI's upward momentum, led by large-cap stocks, is low.

Accordingly, securities firms are raising their voices that unless there are significant changes in key variables such as global economic growth forecasts and corporate profit growth forecasts, the existing rotation market could continue. Despite continued net selling by foreigners in the domestic stock market in July, sectors with net foreign buying include IT home appliances and chemicals (batteries), IT hardware, telecommunications services, and steel. Researcher Park said, "These sectors are broadly related to the stabilization of market interest rates (including China's reserve requirement ratio cuts)." He added, "During the period of domestic and international market interest rate stability, it is necessary to increase attention to these sectors from the perspective of a rotation strategy." However, from around the August Jackson Hole meeting or the September Federal Open Market Committee (FOMC) meeting, market interest rates are expected to rebound, which will likely change the rotation trend. Sectors that could see relative performance improvement during a rising interest rate phase include banks and automobiles, which are sensitive to economic cycles.

However, there is also a view that growth stocks remain more favorable while the second-quarter earnings season continues. So far, 29 companies have announced a total operating profit of 20.4 trillion KRW, and excluding Samsung Electronics, the results were 10% below market expectations. About 60% of the 29 companies that reported earnings belong to specific large business groups. In particular, companies belonging to the POSCO Group, Hyundai Motor Group, and Hyundai Heavy Industries Group tend to be value stocks, such as materials, industrial goods, and consumer discretionary sectors. Hanwha Investment & Securities researcher Ahn Hyun-guk analyzed, "Over the last nine quarters since 2019, when the combined operating profits of these three groups exceeded or fell short of expectations, value and growth stocks showed differentiated stock price performance over two months. When profits exceeded expectations, value stocks outperformed growth stocks by an average of 3.9 percentage points, and when profits fell short, growth stocks performed better." He added, "Currently, the earnings achievement rate (operating profit announced / expected) of these three groups is 87.8%, falling short of expectations," and predicted, "Growth stocks will remain somewhat more comfortable until the earnings season ends."

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