[Practical Finance] 2023 KOSPI Rebound, 'First Half' Is a Turning Point... Depends on 'Interest Rates' and 'Exchange Rates'

Stock Market 2023 Outlook: "Sangjeohago" Pattern
Q1 Low Point, Expected Range 1900~2650
Recovery Depends on Semiconductor Industry Rebound
Inventory Issues Likely Resolved, Revival After First Half

Return of Foreign Investors, Interest Rate and Exchange Rate Variables
Interest Rate Hike Easing Expected After Q1 Next Year
Corporate Earnings Challenges Remain a Concern

[Asia Economy Reporter Kwon Jaehee] Since the beginning of this year, global interest rate hikes have caused fluctuations in stock markets and asset markets worldwide. With just over two months left until next year, investors are highly interested in how long the interest rate hike trend will continue and when our stock market will rebound. The securities industry forecasts next year’s stock market trend as ‘low at the start and high at the end.’ They also advise focusing on two variables: ‘interest rates’ and ‘exchange rates.’

◆ Next Year’s KOSPI Expected Band 1900~2650… Attention Needed on Semiconductor Industry = On the 2nd, compiling opinions from various securities firms’ research centers, next year’s KOSPI is expected to show a ‘low at the start and high at the end’ pattern. From the perspective of economic cycles, next year’s KOSPI is expected to pass through both economic contraction and financial tightening phases simultaneously. A phase transition from a reverse financial market to a reverse earnings market is anticipated between the end of this year and early next year.

Kim Daejun, a researcher at Korea Investment & Securities, analyzed, “In this process, the market is expected to show a short-term decline in upward momentum,” adding, “This is why we expect the lowest point in the first quarter of next year.”

The expected band for next year’s KOSPI is forecasted to be a minimum of 1900 and a maximum of 2650. Korea Investment & Securities suggested a band of 2000~2650. Kiwoom Securities expects 2000~2600, Meritz Securities anticipates 2100~2600, and Shinhan Investment Corp. projects 1900~2600.

The key to the KOSPI rebound is analyzed to depend on the ‘rebound of semiconductors.’ The situation is not favorable. The forecasted net profit for KOSPI next year is 163 trillion KRW, which is a 0.2% increase compared to 2022. However, when divided into semiconductors and other sectors, net profits are expected to be 32.5 trillion KRW and 130.5 trillion KRW, respectively. The semiconductor sector’s net profit is expected to decrease by 26.8% year-on-year, while the net profit growth rate for non-semiconductor sectors is expected to increase by 10.3%.

The consensus is that the semiconductor downcycle persisting this year is likely to continue into next year. Since June, the estimated net profit for semiconductors next year has been rapidly decreasing. This is due to a combination of falling product prices and weak demand.

Nonetheless, the ongoing semiconductor inventory adjustment suggests a possibility of industry recovery after the first half of next year, which is a positive sign. Agyujin, a researcher at DB Financial Investment, said, “With limited supply increases, the lowered memory prices are expected to trigger increased shipments, leading to a rebound in the memory industry from the third quarter of next year.”

◆ Will Foreign Investors Return Next Year? Variables Are ‘Exchange Rate’ and ‘Interest Rate’ = For the stock market to rebound, the ‘comeback’ of foreign investors is essential. This year, foreign investors have maintained a net selling stance on domestic stocks. The foreign ownership ratio, which was 37.7% in February 2020, dropped to 29.3% as of September 2022.

The biggest variable for foreign investors to return next year is the exchange rate. The won-dollar exchange rate surged to the mid-1400s in the second half of this year. Due to the rise in the dollar price, a safe-haven asset, the attractiveness of the Korean stock market, considered an emerging market, has declined.

However, the market expects the interest rate hike trend to change in the first quarter of next year. The Federal Reserve (Fed), which sets U.S. monetary policy, is expected to maintain the interest rate hike stance until the first quarter of next year due to labor market slowdown. However, there are forecasts that the stance may change afterward. If the pace of rate hikes slows and market interest rates fall, the exchange rate is likely to drop below 1400 won.

Despite the calming of exchange rates and interest rates, there are still factors to consider. There is a possibility that Korean companies’ earnings will worsen further in the first half of next year. Labor Gil, a researcher at Shinhan Investment Corp., diagnosed, “Korea’s export growth rate has turned negative year-on-year since October 2022 and is expected to remain in the negative zone throughout next year,” adding, “Due to the global manufacturing downturn, this will lead to reduced corporate investment and export sluggishness.”

◆ 2023 Investment Strategy… Growth Stocks vs. Value Stocks = The securities industry assesses that it will be difficult to place weight on either growth stocks or value stocks in next year’s investment strategy. Growth stocks have upside potential in terms of performance but lack earnings momentum, while value stocks have limited additional upside potential.

However, assuming the Korean stock market bottoms out in the first quarter and concerns over Fed tightening ease from the second quarter, it is advised to pay attention to growth stocks, especially in healthcare, communication, and IT sectors.

Korea Investment & Securities particularly evaluated IT positively. This is due to significantly downwardly revised earnings in advance, supply-demand gaps caused by foreign selling, and a favorable interest coverage ratio.

Shinhan Investment Corp. forecasts that next year will see more distinct stock price differentiation based on earnings achievement rates than ever before, recommending a strategy focused on stocks with improving sales and profitability. Sectors with improving sales and profitability include consumer staples, transportation, IT hardware, energy, non-ferrous metals, and insurance.

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