[Good Morning Stock Market] KOSPI in Correction Tunnel... "Focus Should Shift to Earnings Stocks"

Fed-driven Negative Factors Continue
Nasdaq Rises 0.05% on Rebound Buying

KOSPI Gains Likely Limited
Focus on Companies with Upward Earnings Revisions

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] The tightening headwinds triggered by the U.S. Federal Reserve (Fed) are pulling down the KOSPI. Although the U.S. Nasdaq index showed an upward trend supported by rebound buying overnight, concerns over interest rate fluctuations are expected to limit the KOSPI's rise. Securities experts advise paying attention to sectors with upwardly revised earnings forecasts as the earnings season begins.

Sangyoung Seo, Researcher at Mirae Asset Securities: “Earnings season begins, focus on sectors with upward earnings forecasts”

The U.S. stock market showed a decline as technology stocks were sold off when the 10-year Treasury yield briefly rose close to 1.81% based on solid employment data. In the latter part of the session, rebound buying flowed in, partially reducing the losses, which is presumed to be due to expectations for a strong earnings season and rebound buying following recent declines. Accordingly, the Nasdaq at one point plunged 2.7% but closed up 0.05%, while the Dow Jones and S&P 500 closed down 0.45% and 0.14%, respectively.

Today, the domestic stock market is also likely to continue its weakness. Technology stocks led the decline in the U.S. market due to ongoing concerns about interest rate changes, and the burden on travel, leisure, and consumer discretionary earnings due to Omicron concerns may act as a drag. In particular, the clear decline in semiconductor and software sectors, which have a high market capitalization weight in the domestic market, is expected to dampen risk asset investment sentiment.

However, the expectation for earnings remains valid, which may limit the expansion of the decline. The operating profit forecast for this year’s KOSPI (236.5 trillion KRW) has been revised upward after a downward trend since the end of July last year. Considering this, the domestic market is expected to see rebound buying centered on sectors with solid earnings and upwardly revised profit forecasts.

Jaeseon Lee, Researcher at Hana Financial Investment: “It is premature to declare early defeat of growth stocks during interest rate hikes”

Based on experience, it is true that value stocks tend to be relatively advantageous in periods where the Korean won weakens and interest rates rise sharply. Since 2008, there have been 14 periods when the USD/KRW exchange rate exceeded 1190 won and the U.S. 10-year Treasury yield rose more than 15 basis points weekly; during these times, value stocks outperformed growth stocks 11 times (80% probability).

However, it is premature to declare the early defeat of growth stocks just because we have entered an interest rate hike phase. Last week's sharp rise in long-term yields was somewhat unusual. The weekly increase in U.S. long-term yields was 18.8 basis points (1bp=0.01%), the highest weekly increase since the outbreak of COVID-19. Since February last year, when the possibility of rate hikes increased, the weekly volatility of long-term yields averaged +5.8bp on rises and -5.2bp on declines.

The increasing proportion of growth stocks with higher earnings visibility is also positive. The combined operating profit estimate for this year’s KOSPI and KOSDAQ is 268.2 trillion KRW, with the contraction in earnings gradually narrowing. In particular, the influence of growth stocks on operating profits has expanded since December, and among detailed sectors, the earnings influence of media and gaming has increased since October.

Since the outbreak of COVID-19, Bitcoin has shown a higher correlation as an inflation hedge in the U.S. compared to gold. If the hedging appeal of Bitcoin continues, the possibility of a rebound in related asset classes should also be considered. During Bitcoin price increases, the asset class with a high correlation is growth stocks rather than value stocks. Among these, IT home appliances centered on secondary batteries and software showed relatively strong performance.

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