"October Sell-Off" Stock Adage Calls for 'Caution' This Year

Sell in May, Buy in October
Financial Markets Shake Up in 2023 Due to COVID-19
Watch for US Tapering and China's Sentiment

[Asia Economy Reporter Junho Hwang] ‘Sell in May, and Buy in October.’

This is a long-standing adage circulating in the stock market. Generally, October is associated with an increase in industrial production capacity utilization due to the year-end consumption season in developed countries and inventory replenishment for the following year, which can lead to stock market stimulation. Recently, with foreign capital flowing into the domestic stock market, there is a sense that this adage might become a reality. However, voices of caution are being raised in the securities industry.

With two days left until October, foreigners, who hold the key to boosting the domestic stock market, are flocking to it. According to the Korea Exchange on the 28th, foreigners have net purchased about 988.8 billion KRW in the KOSPI over three trading days since the 23rd. Considering that the total trading volume, combining net purchases and net sales by foreigners from the 1st to the 27th of this month, is about 1.5834 trillion KRW, this is an encouraging figure.

Foreigners’ shopping is concentrated on large-cap stocks. In particular, their affection for semiconductor stocks is strong. Foreigners have been net buying Samsung Electronics for the past eight trading days, purchasing about 1.1493 trillion KRW worth. Kyungmin Lee, a researcher at Daishin Securities, analyzed, "In addition to semiconductors, foreign net buying is evenly flowing into large-cap sectors such as steel, healthcare, automobiles, transportation, banking, construction, energy, and chemicals," indicating that "passive funds are flowing into the Korean stock market."

However, there are forecasts that this atmosphere may not last long. In the near term, variables in the Chinese market could affect the domestic stock market. The Chinese stock market is showing weakness ahead of the National Day next month. On the 29th of this month, the interest payment date of 47.5 million USD (about 56.025 billion KRW) for China Evergrande Group, which has negatively impacted the domestic stock market due to bankruptcy issues, will arrive.

In the mid-to-long term, the weakening effect of U.S. monetary and fiscal policies is also expected. Byungyeon Kim, chief investment strategy researcher at NH Investment & Securities, said, "COVID-19 has changed the financial market patterns this year," and predicted, "Unlike past patterns focused on industrial production in October, the fourth quarter of this year will focus on the weakening of the policy mix (monetary + fiscal policy effects), which has been the driving force behind stock market rises." He further analyzed, "Emerging markets, including Korea, are expected to continue decoupling from developed countries due to U.S. tapering and China’s risk-asset unfriendly policy stance."

A decrease in the growth rate of domestic corporate earnings is also expected due to the disappearance of the COVID-19 base effect. According to Daishin Securities, the KOSPI net profit forecasts for this year and next year have been revised downward by 0.1% and 1.3%, respectively, over the past month. As a result, the 12-month forward net profit also dropped by 0.6%.

Jiyoon Kim, a researcher at Daishin Securities, said, "The spread of the Delta variant is weakening the earnings reliability of cyclical export and consumer stocks, which were expected to lead earnings improvement in the second half of this year," and added, "The deterioration in corporate earnings forecasts could be a factor that hinders the KOSPI’s trend reversal to an upward trajectory." Accordingly, she suggested, "It is necessary to pay attention to sectors such as transportation, steel, construction, H/W, banking, and telecommunications, which have mid-to-long-term stock price growth momentum and show favorable earnings forecast trends."

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