Has KOSPI Hit Bottom?… KB Securities "Increase Stock Allocation in February"

[Asia Economy Reporter Ji Yeon-jin] There is a forecast that the domestic stock market, which plunged sharply last month, will hit bottom from mid-this month. Since the stock prices, which had been in a downtrend until this spring, are expected to form a 'double bottom' process where they either fail to form a lower low or form a similar low, it is advised to increase stock allocation this month.

According to the 'February Strategy' report published by KB Securities on the 31st, last year’s domestic stock market was further destabilized by concerns over economic slowdown, the U.S. Federal Reserve's (Fed) tightening, LG Energy Solution's new listing, and Fed Chair Jerome Powell's hawkish inflation remarks. In particular, LG Energy Solution's new listing significantly lowered the KOSPI price-to-earnings ratio (PER) from around 10 times at 2760 to 2620.

Looking ahead, the key additional risk is identified as the ‘long-term interest rate.’ KB Securities researcher Eun-taek Lee said, "If the market judges that the economy will contract due to Powell’s tightening, long-term interest rates will fall, which will cause an inversion of short- and long-term interest rates," adding, "Excluding this scenario, there are clearly positive factors such as China’s stimulus measures and reopening policies."

The credit default swap (CDS) premium for Russia and Ukraine has already approached the level seen during the Crimea crisis in early 2014. Although uncertainty may continue, the risk reflected in the financial market is expected to peak around early to mid-this month.

Additionally, the easing of the Omicron variant in the U.S. is expected this month. This will serve as a background to improve future supply bottlenecks and is projected to alleviate inflation concerns around April.

Moreover, the earnings outlook for Korea this year, which had been declining until the end of last year, has started to rise since the beginning of this year. The sectors leading the upward trend are IT manufacturing, transportation, and finance. Sectors with downward outlook changes are mainly consumer sectors (hotel leisure, retail, media, cosmetics). Researcher Lee explained, "The upward revision in financial earnings is backed by rising interest rates, which are rooted in ‘inflation concerns.’ The fact that IT manufacturing and transportation earnings are being revised upward shows the ‘gap between production and consumption’ in the global economy, as these sectors play roles in intermediate goods production and transportation. Production has increased and still has room to rise, but consumption has yet to catch up."

Therefore, at the beginning of the month when the market is finding its bottom, from a trend-following perspective, ‘stocks related to strong earnings in production and inflation (IT, energy, transportation)’ may be advantageous. However, in the mid- to long-term, interest will also be paid to inflation easing and reopening on the consumption side (hotel leisure, media, automobiles, essential consumer goods).

However, since the government is striving for inclusion in the MSCI developed market index, the full resumption of short selling may be decided within February, which poses another burden.

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