[Good Morning Stock Market] "Market Remains Solid but Differentiation Continues... Focus on Growth Stocks with High Earnings Visibility"

[Asia Economy Reporter Eunmo Koo] Despite the highlighted risks such as concerns over the resurgence of the novel coronavirus infection (COVID-19) and conflicts between the United States and China, the recent index has been moving sideways, showing a solid bottom. Amid ongoing concerns about fundamentals, since fluctuations occur depending on corporate earnings and differentiation can continue, it is analyzed that responding with a focus on growth stocks with high earnings visibility would be effective.

◆Ye-eun Kim, Researcher at IBK Investment & Securities=Uncertainties surrounding COVID-19 continue, and related issues still exert influence on the market. However, the market reaction is not significant compared to the speed of the spread. Although re-lockdowns have appeared in the U.S. and lockdown measures have been implemented in the U.K., somewhat weakening expectations for economic improvement, the market is not reacting strongly as it did during previous outbreaks. While the number of new confirmed cases is increasing, the death toll is not rising significantly, which is helping to stabilize investor sentiment. The accommodative monetary policies of major central banks also alleviate concerns about economic slowdown, leading to positive reactions.

However, the index has been moving sideways after a sharp rise driven by expectations of economic improvement and liquidity, reflecting the market’s elevated expectations. Now, for the index to rise further, a clear improvement in fundamentals is necessary. One signal could be the improvement in corporate earnings.

The Q2 earnings season begins on the 7th with Samsung Electronics. Although expectations for Q2 earnings are low due to COVID-19, it is also true that earnings expectations for the semiconductor sector have risen higher than ever following the earnings announcement of U.S. semiconductor company Micron.

However, most other sectors besides semiconductors have yet to show signs of a rebound. In other words, it is necessary to consider not only earnings but also government policies and macro factors. Additionally, as interest in sector-specific earnings in the second half of the year grows, a growth stock-centered trend is expected to continue.

Currently, unlike in the past, the index rise is led not by foreigners but by individuals. Individuals, backed by abundant liquidity, have actively net bought, driving the index upward. However, relying solely on individual buying power is limited due to the ongoing risks such as COVID-19 impact and U.S.-China conflicts. Therefore, the concentration phenomenon is expected to continue, and since earnings are also expected to support the growth stock trend, it is appropriate to focus on leading growth stocks while maintaining a conservative strategy considering risks.

◆Seungbin Cho, Researcher at Daishin Securities=As the global stock indices continue their rebound phase, changes are appearing in corporate earnings forecasts. The 12-month forward earnings revision ratio, which leads the global stock indices’ earnings per share (EPS) consensus, has shown a recovery for two consecutive months, raising expectations for an upward revision in corporate earnings forecasts.

The 12-month forward earnings revision ratio of global stock indices, which fell to -36.7% in April, improved to -25.6% in May and -7.6% in June. However, it is judged that more time is needed for an upward revision in corporate earnings forecasts. The recent rebound in the earnings revision ratio was due more to a rapid decrease in downward revisions than an increase in upward revisions. The decrease in downward revisions reflects both the easing of COVID-19 concerns and expectations for economic normalization, but it may also be the effect of analysts finishing their earnings forecast revisions after the Q1 earnings season. Since corporate earnings are likely to remain weak through Q2, downward revisions in earnings forecasts by analysts may resume once the Q2 earnings season begins.

The earnings revision ratios across sectors of global stock indices have generally rebounded across all 10 sectors. Notably, the IT and healthcare sectors show the highest earnings revision ratios. Investors’ interest in IT and bio industries, which lead the untact culture after COVID-19, is increasing, and the relatively favorable earnings outlooks for these sectors confirm this trend.

In the Korean market, earnings revision ratios have also rebounded across all 10 sectors. Unlike global stock indices, where all 10 sectors remain in negative territory, the Korean market shows positive earnings revision ratios in materials, consumer staples, healthcare, IT, communication, and utilities sectors. The communication (internet) and healthcare sectors, expected to benefit from COVID-19, show relatively high earnings revision ratios in the Korean market as well.

As time passes after COVID-19, the earnings stability of the Korean market is expected to become more prominent. Since 2018, as global trade slowed, earnings forecasts for the Korean market, which has a high export ratio, were adjusted downward relatively quickly, and its earnings revision ratio began to lag behind the global stock indices. However, by effectively controlling the spread of COVID-19 compared to other countries, the Korean market’s earnings stability is increasing. The fact that sectors with high long-term growth potential such as secondary batteries, bio, internet, and IT are leading the Korean market’s strength also enhances its investment attractiveness. Although volatility in the stock market may increase as the Q2 earnings season approaches, if economic activities normalize and global trade improves in earnest, expectations for earnings growth in the Korean market could rise further.