[MarketING] Time to Focus on Cyclical and Value Stocks in the Market

Recent Strength in Cyclical Stocks like Steel and Construction
Value Stocks Outperform Growth Stocks When the Economy Turns

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The KOSPI continued its upward trend for the second consecutive day but showed only a slight increase due to limited gains. As the rally of secondary battery stocks, which had driven the market's strength, gradually slowed down, value stocks centered on cyclical stocks have emerged as an alternative.

KOSPI Rises Slightly for Two Consecutive Days

On the 21st, the KOSPI closed at 2,458.96, up 3.84 points (0.16%) from the previous day. The KOSDAQ ended the session at 793.42, rising 4.53 points (0.57%).

With inflation and tightening concerns trapping the index within a range, a stock-specific market continues amid limited movement. Kim Seokhwan, a researcher at Mirae Asset Securities, explained, "The KOSPI and KOSDAQ fluctuated around the flat zone before turning upward. Due to the U.S. stock market holiday the previous day, foreign buying was limited by the lack of direction, and a wait-and-see stance persisted ahead of the release of the U.S. Federal Open Market Committee (FOMC) minutes, the Bank of Korea's Monetary Policy Committee meeting, and the U.S. Personal Consumption Expenditures (PCE) price index."

Cyclical stocks are showing notable strength. On that day, in the KOSPI market, the construction sector rose 3.53%, steel and metals 1.8%, chemicals 1.82%, and machinery 0.87%. Researcher Kim said, "Cyclical sectors such as steel, machinery, and chemicals continued their strong performance. Ahead of China's Two Sessions (National People's Congress and Chinese People's Political Consultative Conference) on March 4, expectations for expanded infrastructure investment have increased, reflecting a recovery in steel demand and an increase in chemical raw material exports due to consumption recovery."

As the rally of secondary battery stocks, which led the market rebound since the beginning of the year, gradually slows, value stocks centered on cyclical stocks are emerging as an alternative. Labor Gil, a researcher at Shinhan Investment Corp., said, "Secondary batteries have been the main driver of the Korean stock market's rebound since the beginning of the year, but recently they have faced some noise. Overcorrected sectors have finished closing the performance gap, growth stocks are faltering due to reduced expectations for Federal Reserve (Fed) monetary easing, and price-cutting pressures have emerged across the electric vehicle industry." He added, "If secondary battery stocks take a breather, investors will face deeper concerns about what to look for next."

Since secondary battery stocks became a leading force in the Korean stock market in 2019, there have been four periods when their returns underperformed the KOSPI. During those periods, financials, consumer discretionary, industrials, and utilities generally showed relatively good returns. Researcher Noh said, "One clear fact was the relative advantage of value stocks over growth stocks. Among value stocks, cyclical stocks showed superiority over defensive stocks; representative cyclical stocks such as banks, transportation, and steel recorded the highest relative returns during those periods. Cyclical stocks were an alternative during past secondary battery stock pauses."

Economic Rebound Cycle, Value Stocks Advantage

As the global economy is expected to hit bottom and rebound, opinions suggest that value stocks will outperform growth stocks during the rebound cycle.

Park Seungyoung, a researcher at Hanwha Investment & Securities, said, "This spring is expected to be the period when the global economy bottoms out and turns around. The U.S. economy seems to need a correction, but while the U.S. economy is declining, the gap will be filled by China's rebound."

Considering the global economic rebound led by China, it is forecasted that beta (market average return seeking) will become more important than alpha (market excess return seeking) in the stock market. Researcher Park said, "When the economy turns, stocks with high beta rise. In the domestic market, sectors with high beta include materials, industrials, and IT. If we focus on sectors more sensitive to China's economy than the U.S., the priority narrows down to chemicals, transportation, and handsets."

Analysis indicates that value stocks have an advantage over growth stocks in this rebound cycle. Researcher Park explained, "Domestic manufacturers' profit margins tend to improve during economic turnarounds, especially when operating cash flow improves and investment cash flow is controlled. Investments by domestic manufacturers, which increased from 2019 to 2022, are expected to be conservative this year, so investment cash flow will be controlled, but as the economy turns, operating cash flow is likely to improve, leading to expected profit growth for value stocks."

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