by Kim Minyoung
Published 08 Oct.2024 10:58(KST)
During the Q3 earnings season, there is a forecast that the so-called 'decoupling' phenomenon?where domestic companies' profits improve while global stock markets rise and domestic stock markets fall?may gradually ease.
In a report released on the 8th, Byung-Yeol Kwak, a researcher at Leading Investment & Securities, stated, "The risk premium of global stocks has remained at its lowest level in 20 years despite monetary easing policies by major central banks. In contrast, if the domestic stock market's expected returns increase due to valuation attractiveness from significant price adjustments relative to earnings, that is, if earnings visibility improves through the Q3 earnings season, we expect a gradual easing of the decoupling."
Researcher Kwak viewed the decoupling phenomenon in the Korean stock market as excessive even when compared to the global and emerging markets. He analyzed, "Compared to the phase of the most intensified decoupling in the Korean stock market over the past decade, it is currently in an area of excessive price-to-earnings ratio (PER) discount relative to the global and emerging markets. However, this time, the decoupling occurred simultaneously with the global and emerging markets, which is a difference from the past (around 2018 and 2022)."
Moreover, considering the controversy over the peak of leading indicators and export cycles, Kwak believes the current level of decoupling is excessive. He diagnosed, "The decoupling of the domestic stock market was strengthened during the peak-out phase (formation of a high point followed by a decline) of the OECD Korea Leading Economic Index. Since the direction of domestic export growth rates is determined with a slight lag to the leading index, this can be interpreted as a more favorable macroeconomic situation compared to past instances where interest rate cuts were made after the peak-out of leading indicators and export growth rates."
Corporate profits are cited as a weakness. A slowdown in the domestic earnings cycle compared to the global one has been detected. Kwak said, "The domestic corporate earnings outlook has recently been revised downward compared to the global outlook, raising concerns about a slowdown in earnings momentum. Considering that the downward trend in domestic corporate earnings forecasts was clear during the decoupling phase of the domestic stock market compared to the global market, the current phase could be unfavorable in terms of earnings visibility."
Accordingly, he advised responding by focusing on sectors within the domestic market that have low earnings sensitivity to the economic cycle (low-beta and defensive stocks) or sectors where a soft landing of the earnings cycle is possible.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.