Next Year's Stock Market, Remember 7 Years Ago

2016 US Tight Monetary Policy, China Easing Monetary Policy
2022 US Interest Rate Hikes, China Reserve Requirement Ratio Cuts
Next Year KOSPI Net Profit Growth Rate Expected to Be Single-Digit, Showing Similar Patterns

[Asia Economy Reporter Ji Yeon-jin] As the U.S. Federal Reserve (Fed) raised the benchmark interest rate, short-term interest rates surged sharply, the long- and short-term interest rate spread declined, and international oil prices soared, surpassing $70 per barrel. The People's Bank of China lowered the reserve requirement ratio for banks, leading to a surge in the growth of total social financing. This is not a story about the end of this year. It reflects the 2016 situation when the U.S. shifted to a tightening monetary policy while China maintained a loose monetary policy. There is a possibility that next year's stock market will follow a similar trend to 2016, when the U.S. raised its benchmark interest rate.

According to the financial investment industry on the 13th, the U.S. Fed raised the benchmark interest rate for the first time in December 2015 and proceeded with a second rate hike in December 2016. Currently, the market expects the Fed to raise rates 2 to 3 times next year.

China's monetary policy is also similar. In 2015, the People's Bank of China maintained its policy of lowering the reserve requirement ratio. This year, the PBOC announced two rounds of reserve requirement ratio cuts, and recently, total social financing has shown an upward trend for two consecutive months.

In 2016, as the U.S. implemented monetary tightening policies in earnest, a "Fly to quality" phenomenon appeared in the stock market. "Fly to quality" is an investment term meaning that funds move to the safest assets. At that time, the U.S. High Quality Index, composed of companies with high operating profit margins and low debt ratios, recorded favorable returns. Recently, as the S&P 500 operating profit margin stagnated at a record high level in the 15% range, funds have flowed into high-quality ETFs for two consecutive months. Apple, a constituent stock of the High Quality ETF, recently surged in price and hit a new high on the 10th (local time).

The domestic stock market is also expected to experience a d?j? vu of 2016. At that time, the stock market saw strong performance in semiconductors, steel, shipbuilding, display, and banking sectors, which had poor returns in 2015, while leading sectors such as media, healthcare, and consumer staples were weak. In particular, 2016 was the year when profit improvements in the semiconductor sector began in earnest as U.S. tech investments started. Samsung Electronics and SK Hynix recorded annual stock returns of 43% and 46%, respectively.

Another similarity is that the KOSPI net profit growth rate fell to single digits in 2016, and next year's KOSPI net profit growth forecast may also be in single digits or negative. Lee Jae-man, a researcher at Hana Financial Investment, said, "The expectation that U.S. tech sector investment could reach an all-time high next year still seems valid," adding, "Considering the possibility of entering the early phase of semiconductor profit cycle improvement, the likelihood of a simultaneous rally in Samsung Electronics and SK Hynix, as in 2016, is high." He also forecasted that companies completing downward revisions of 12-month expected net profits and turning around will likely see solid stock returns.

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