"During Interest Rate Hikes, Focus on Transportation and Energy... Industries with Short Investment Recovery Periods Are Advantageous"

[Asia Economy Reporter Lee Jung-yoon] Advice has emerged that during periods of rising interest rates, investors should focus on industries with shorter investment recovery periods. Instead of concentrating on corporate profits over the next 1 or 3 years, attention should be paid to the profits of the upcoming quarter, with transportation and energy sectors identified as key areas of interest.

On the 21st, Lee Jae-man, a researcher at Hana Financial Investment, stated, "During periods of rising interest rates, investors generally prefer investments with shorter durations (investment recovery periods)." He added, "Long-term investments tend to have higher volatility, so short-term investments are preferred." He further explained, "From the perspective of stock investors, to shorten duration, focus should be on profits (growth) of the next quarter rather than corporate profits (growth) over the next 1 or 3 years."

According to the researcher, during previous U.S. Federal Reserve (Fed) rate hike phases?from June 2004 to June 2006 and from December 2015 to December 2018?the KOSPI's stock returns were determined by whether earnings estimates were revised upward (average monthly return of 0.7%) or downward (-0.6%). Notably, when quarterly net profit estimates were revised upward rather than 12-month forecasts, the average monthly return was higher at 2.8%.

The researcher explained, "In the current situation, the upward revision of net profit estimates for Q1 2022 is more important than the net profit for the entire year of 2022." He added, "Among sectors with upward revisions in Q1 2022 net profit estimates, attention should be paid to those with an annualized PER (annualized price-to-earnings ratio: Q1 net profit × 4 ÷ market capitalization) lower than the 2022 annual PER, indicating shorter duration." Industries with short durations include transportation, energy, banking, insurance, telecommunications, and retail/distribution. Specifically, transportation recorded an annualized PER of 4.7 times in Q1 this year and 5.6 times for the full year. Energy showed 7.6 times and 8.9 times, and insurance 7 times and 7.7 times, respectively.

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