[Good Morning Stock Market] Cautious Market "Avoid Aggressive Moves Until Material Results Are Confirmed"

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[Asia Economy Reporter Lee Seon-ae] Last week, the KOSPI fell by more than 3%. In particular, the index declined for two consecutive weeks, and the magnitude of the drop was larger than before, drawing attention to the causes of the decline. Coincidentally, there was not just one reason for the KOSPI's poor performance. All major variables?macro factors, earnings, and supply and demand?worked unfavorably for the market.

From a macro perspective, U.S. monetary policy and China's industrial regulations were problematic. First, the July Federal Open Market Committee (FOMC) minutes confirmed the possibility of early tapering (reduction of asset purchases), which suppressed investor sentiment. The prospect that the Chinese government might impose regulations on other industries following private education and platforms also acted as a negative factor for stock prices. Earnings and supply-demand conditions were also challenging. The slight downward revision of this year's KOSPI net profit forecasts and the strong net selling by foreigners have been burdensome for the overall stock market. For the market to show a different trend under these circumstances, changes must occur in the aforementioned environment. This week, it is necessary to first look for such signals.

◆ Kim Seong-no, Researcher at BNK Investment & Securities = Concerns about the economy and earnings are fueling the KOSPI's decline. The expected realization of U.S. tapering and the possibility of a rate hike in Korea are negative factors. However, with individual liquidity in the stock market continuing to increase, we expect domestic institutional selling to weaken going forward.

There is a risk that the U.S. economic growth forecast will be revised downward at the September FOMC, which is negative economically but could serve as a basis for maintaining a stimulus stance despite tapering. The easing of pressure due to the Q2 earnings surprise is positive.

However, as the KOSPI's 12-month forward earnings per share (EPS) declines, confidence in earnings is rather being undermined. If LG Energy Solution's listing and the decline in DRAM fixed transaction prices materialize, it will inevitably accelerate the EPS decline of the KOSPI.

From a sentiment perspective, attention should be paid to price variables. The increase in Q (quantity) due to the earnings surprise in the first half was positive, but above all, it can be seen as a result of price increases (P). Considering the economic recovery trend in the second half, Q is expected to continue increasing, but if the price variable turns downward, it could be fatal to earnings. For this reason, in the short term, price trends are expected to have a significant impact on the KOSPI.

◆ Heo Jae-hwan, Researcher at Eugene Investment & Securities = The KOSPI fell below the 3100 level for the first time in about four months. Since July 6, when the KOSPI was at 3305, it has dropped by 7.4%. The KOSDAQ fell by 7.0% over the past week. Since the annual high of 1060 on August 9, it has declined by 8.7%. It was not only the Korean stock market that was sluggish; except for India, global stock markets showed clear correction patterns.

The domestic market situation is worse. There was continuous panic selling last week, indicating serious distress among individual investors. However, this is more due to a supply-demand gap than fundamentals. The large-scale selling by foreign investors is partly due to semiconductor industry conditions, viruses, and capital outflows caused by China's industrial regulations. Additionally, after large domestic IPOs, the supply-demand base for existing circulating stocks has become more fragile.

The previously relentless buying by individual investors is likely to weaken. Last week, the government tightened household loan regulations, which is negative for individual investors. Currently, the credit loan balance ratio is high. Individual investors who find it difficult to secure additional funds may have no choice but to sell their holdings. The possibility of a Bank of Korea rate hike within the year is also a burden. The tightening of loan regulations could lead to rate hikes.

It is not a situation where economic and corporate fundamentals have deteriorated. For example, the won/dollar rate approaching the 1180 level is unlikely to rise further considering the trade surplus and recent oil price declines. However, it is difficult to find a turning point now. Risk management is necessary. Despite the foreign investors' selling bias, sectors such as banks, telecommunications, pharmaceuticals, and steel, which have been steadily bought, are expected to perform well.

◆ Kim Dae-jun, Researcher at Korea Investment & Securities = At present, the market atmosphere is not in a state where it can change rapidly. It is time to find various factors that can restore risk asset preference. We need to watch closely whether any favorable variables emerge ahead of the Jackson Hole Symposium.

In this regard, we should monitor the spread of the Delta variant and vaccination speed in the U.S., U.S. PMI and durable goods orders, and the Bank of Korea's monetary policy rate decision. If better-than-expected results come from these areas, market sentiment could change. Otherwise, the depressed mood may continue. Therefore, this week, it is necessary to avoid aggressive responses until the results of these factors are confirmed and to refine strategies.

Currently, the KOSPI stands at 3060, below the 12-month forward price-to-earnings ratio (PER) of 11 times. The index level may rise or fall as various factors are digested. However, under current circumstances, I do not expect the level to fall to 2900, which corresponds to a PER of 10 times. No matter how bad the situation gets, the first downside support is expected to form around 3000, corresponding to a 12-month forward price-to-book ratio (PBR) of 1.1 times. This point should be considered as a reference for index-level responses.

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