KOSPI in September Rising Amid Earnings Season "Will It Fall to 2200?"... True Bottom at 2050 Approaching

[Asia Economy Reporter Lee Seon-ae] The KOSPI, which ended its 'bear market rally' amid Federal Reserve (Fed) Chair Jerome Powell's determination to strengthen monetary tightening, is set to enter a phase of negative earnings momentum starting in September due to downward revisions in corporate profit estimates. It is expected to face strong downward pressure, with some opinions suggesting the lower bound could open up to 2200.

◆Upper Bound Blocked, Lower Bound Opening

On the 31st, the securities industry generally set the lower bound of the KOSPI for September at around 2300, while expecting the upper bound to remain capped. Kim Hyung-ryeol, Head of Research Center at Kyobo Securities, said, "Regarding the September stock market, the first thing that comes to mind is the possibility of a weakening rebound trend," adding, "The persistently high inflation environment is unlikely to change soon, which could continue to trouble the financial markets."

Sangsangin Securities lowered its lower bound from 2400 to 2300, based on the view that the Fed's aggressive tightening and concerns over corporate earnings in the second half will weigh on the market. Kim Jang-yeol, Executive Director at Sangsangin Securities, stated, "We need to reflect the lowered expectations due to the Fed's clear stance declaration."

Daishin Securities also lowered its upper bound from 2650 to 2550. Lee Kyung-min, a researcher at Daishin Securities, explained, "The August Consumer Price Index (CPI) scheduled for release on the 13th, the Federal Open Market Committee (FOMC) meeting on the 21st, and the start of the third-quarter earnings season will serve as turning points, expanding downward pressure on the KOSPI and global stock markets," adding, "From mid-September, the KOSPI and global financial markets will enter a negative earnings phase, forcing a downward revision of the upper bound." Daishin Securities also projected the KOSPI bottom could fall to 2050 by the end of this year or early next year, noting that the negative earnings phase will intensify from Q4 2022 to Q1 2023, leading to a second decline and a rock-bottom low for the KOSPI.

There is also a conservative view that the KOSPI will fall to test the previous low. SK Securities predicted that the KOSPI could drop to the previous intraday low of 2276 recorded on the 4th of last month, based on the likelihood of a 75 basis point hike at the September FOMC and growing concerns over corporate earnings.

Shinhan Investment Corp. and Samsung Securities set a higher upper bound at 2600. Labor Gil, a researcher at Shinhan Investment Corp., said, "Considering the decline in export growth rate and the possibility of downward revisions in earnings estimates, the index's upper bound is expected to be limited," but added, "However, the previous low of 2292 recorded after market close on the 6th of last month is unlikely to be broken." He emphasized, "The previous low was a joint product of Fed tightening fears and recession concerns. Since tightening fears are not greater than in June, and recession concerns are also not higher than in June, the changed situation must be taken into account."

◆Selective Defensive Investment in Individual Companies

Kim, Head of Research at Kyobo Securities, advised, "No major shock threatening the previous low is expected," and suggested, "In September, top picks include secondary batteries, shipbuilding, solar power, food and beverage, and bio sectors. Until year-end, selective investment in sectors and individual companies differentiated from the market is necessary."

Lee Jae-seon, a researcher at Hyundai Motor Securities, noted, "Despite the recent high exchange rate, foreigners have net purchased 5.2 trillion KRW of KOSPI since July, which is positive," and recommended, "Among the sectors attracting market attention in August?solar power, shipbuilding, defense, nuclear power, and others?since solar power and shipbuilding prices have risen rapidly, it is advisable to respond with relatively less burdened defense and nuclear power sectors."

Shinhan Investment Corp. emphasized that sector strategies are more important than the index at this stage. The 12-month forward earnings per share (EPS) for the KOSPI is 252 points, down 6.5% from this year's peak. It is seen as a process where economic uncertainties in 2023 are impacting downward revisions in Korean earnings estimates.

Researcher Roh said, "If next year's earnings are revised downward more rapidly, it will be difficult to avoid an EPS decline until the end of this year," adding, "Since historically, during periods when KOSPI earnings consensus was declining, returns tended to be flat or declining, it is important to focus on earnings and pay attention to sectors that can continue to perform next year." He advised, "From the perspective of earnings variables, sectors such as chemicals, IT hardware, machinery, cosmetics, and defensive stocks with earnings growth, as well as energy hedge defensive stocks centered on city gas utilities, can be used to respond to the stock market in September."

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