[MarketING] Growing Burden Amid Steep Rise

The KOSPI is showing a downward trend for the first time in seven days. The recent continuous rise has increased valuation burdens, and the pressure from profit-taking sales has also grown. There are opinions that a period of adjustment is necessary to relieve the valuation burden.

As of 10:25 a.m. on the 17th, the KOSPI was at 2,570.90, down 0.59 points (0.02%) from the previous session. The KOSDAQ fell 3.61 points (0.40%) to 900.23.

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The fatigue accumulated from the sustained rise and the weakness in the U.S. stock market on the 14th appear to have influenced the stock price movement on this day. On the 14th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 0.42%, the S&P 500 dropped 0.21%, and the Nasdaq declined 0.35%, each closing lower than the previous day. Sangyoung Seo, a researcher at Mirae Asset Securities, explained, "Despite weak economic indicators, the U.S. stock market started higher supported by strong corporate earnings announcements, but turned downward after hawkish remarks by Federal Reserve (Fed) Governor Christopher Waller and the University of Michigan's 1-year expected inflation was sharply revised upward from 3.6% to 4.6% during the session. The dollar's strength and a sharp rise in Treasury yields led to selling pressure across most stocks except bank shares, resulting in a decline."

U.S. retail sales in March decreased by 0.1% month-over-month, raising concerns about slowing consumption following a 0.2% decline reported last month. Industrial production in March increased by 0.4% month-over-month, exceeding the previously reported 0.2% increase. Researcher Seo said, "Looking at these U.S. real economy indicators, there is a high concern that the U.S. economy is continuously slowing, making sustained corporate earnings improvement unlikely, which dampens investor sentiment."

Fed Governor Waller stated, "Inflation remains high, so tighter monetary policy must be further strengthened," adding, "This monetary policy stance will need to be prolonged longer than the market expects," dismissing the possibility of interest rate cuts. Additionally, the University of Michigan's April expected inflation rose sharply from 3.6% to 4.6%, which, combined with Waller's hawkish remarks, negatively impacted the stock market.

Researcher Seo analyzed, "The U.S. stock market's decline due to the surge in expected inflation and hawkish Fed officials' comments will burden the domestic stock market. In particular, the dollar's strength and the sharp rise in interest rates increase the likelihood of weakness centered on technology stocks, which is also a burden. The two consecutive months of retail sales contraction could stimulate concerns about future U.S. manufacturing production decline and consequent reduction in Korean exports." He added, "There is a high possibility of profit-taking sales following the recent rise, which will lead to increased volatility."

Amid tightening concerns, the won-dollar exchange rate started higher and surpassed 1,300 won again. In the Seoul foreign exchange market, the won-dollar rate opened at 1,305.0 won, up 6.1 won. The won's weakness was accompanied by noticeable foreign selling. Foreign investors sold 188.7 billion won in the KOSPI market and 147.9 billion won in the KOSDAQ market on this day.

As the stock market has continued its upward trend recently, the valuation burden has increased. There are opinions that a period of adjustment is necessary to relieve this burden.

Kyungmin Lee, a researcher at Daishin Securities, said, "The KOSPI breaking through 2,550 points is judged to be a short-term overshooting caused by the rapid rise and concentration in secondary battery stocks," adding, "With the global stock market's fluctuations and the start of the first-quarter earnings season, if the strength in secondary battery stocks weakens, the KOSPI will enter a short-term correction phase."

In particular, the valuation burden has increased due to the sustained rise. Nogil Roh, a researcher at Shinhan Investment Corp., said, "The KOSPI's 12-month forward price-to-earnings ratio (PER) is currently 13.7 times, and if the KOSPI settles at 2,630 points, it will be 14 times," adding, "The current valuation is similar to the period from mid-2020 to early 2021, when the financial environment was converging to zero interest rates and the KOSPI's earnings growth in 2021 was 117% compared to the previous year. Considering that the expected earnings growth for next year compared to this year is around 52%, the KOSPI PER is in a financial and fundamental situation that is difficult to compare with historical highs."

Researcher Roh emphasized, "Even excluding the influence of secondary battery stocks, the valuation burden is increasing," adding, "The recent stabilization of the sharp decline in the 12-month forward earnings per share (EPS) and the fluctuation around the bottom is a positive change, but upward revisions to earnings forecasts are limited, so at least a period of adjustment is necessary to relieve the valuation burden."

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