Rapid Interest Rate Surge Causes Inversion of Short- and Long-Term Yields, 'KOSPI Profit Erosion Trajectory'... Uncertain Path to Escape Boxpi

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[Asia Economy Reporter Lee Seon-ae] There are forecasts that it will become difficult for the domestic stock market to break out of its box range due to the sharp rise in government bond yields and the inversion of short- and long-term interest rates. It is analyzed that the rise in costs caused by soaring interest rates and raw material prices will worsen the earnings of listed companies, inevitably limiting the upper bound of the stock market.

According to the Korea Financial Investment Association on the 12th, the 3-year government bond yield in the Seoul bond market closed at an annual rate of 3.186%, up 19.9 basis points (1bp=0.01 percentage point) from the previous trading day (2.987%). This is the highest level in 9 years and 8 months since July 11, 2012 (3.19%). In addition, the 3-year government bond yield rose 9.3bp to surpass the 30-year bond yield (3.146%) for the first time ever, creating a yield curve inversion.

In the securities industry, it is analyzed that the simultaneous occurrence of the sharp rise and inversion of interest rates will slow the annual operating profit growth rate of domestic listed companies compared to the previous year. Financial information firms such as FnGuide and others in the securities industry expect that due to rising costs, the annual operating profit growth rate of domestic listed companies will slow compared to the previous year. Many conservative forecasts suggest that the growth rate may remain in the single digits.

Even considering that the annual operating profit growth rates of listed companies compiled by FnGuide fluctuate based on the compilation date, the average does not reach 10%. For the KOSPI, as of the 8th, it is expected to increase by only 5.75% compared to the consensus. Earlier, the Korea Capital Market Institute also forecasted that the operating profit of listed companies at the beginning of the year would increase by only 7.6% compared to 2021.

The main factor damaging the operating profits of listed companies is the increase in costs due to rising interest rates. For domestic companies, the cost of goods sold accounts for about 80%, making them vulnerable to cost increases such as raw materials and interest rates. Mirae Asset Securities Research Center stated, "Due to margin contraction caused by rising costs, corporate profit momentum is weak, and valuation improvement is difficult due to the impact of rising interest rates, so the domestic stock market is expected to continue limited fluctuations in the second quarter."

The inversion of short- and long-term government bond yields is expected to further fuel the ‘earnings market’ in the domestic stock market. The securities industry expects that not only compared to the same period last year but also stocks and sectors with recently upwardly revised forecasts will show relatively strong performance. Lee Kyung-min, a researcher at Daishin Securities, said, "After the previous three occurrences of short- and long-term interest rate inversions, sectors that showed differentiated earnings strength clearly outperformed," emphasizing, "In an earnings market, differentiated responses by sector and stock are necessary." He added, "Above the KOSPI 2700 level, it is advisable to refrain from chasing purchases and delay increasing weight, but from the 2600 level, a split buying strategy utilizing volatility is recommended."

According to FnGuide, among the 19 KOSPI sectors as of the second week of April, the transportation and warehousing sector showed the highest operating profit growth rate in the first quarter. The consensus for the past month rose by 2.87%, indicating a forecast of strong performance compared to the beginning of the year. Operating profit upgrades are also expected for steel & metals (0.15%) and food & beverages (2.35%). NH Investment & Securities raised operating profit forecasts this year for energy, insurance, consumer goods, IT hardware, transportation, metals, and wood sectors, while lowering forecasts for automobiles, chemicals, cosmetics, apparel, displays, and hotel & leisure sectors. Mirae Asset Securities cited energy, semiconductors, and steel & metals as sectors with large upward revisions in operating profit consensus this year, and display, chemicals, and hotel & leisure as sectors with large downward revisions.

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