[Weekly Market Review] Liquidity and Earnings... KOSPI and KOSDAQ Rise Consecutively Since August

KOSPI Closes Above 2350 After 5 Consecutive Trading Days of Gains
KOSDAQ Index Rises for 10 Trading Days... Jumps to 857.63
Strong Liquidity Drives Unexpected Q2 Earnings Increase

[Asia Economy Reporter Oh Ju-yeon] After surpassing the 2200 level, the domestic stock market quickly jumped to the 2350 level. Both the KOSPI and KOSDAQ indices have been on a continuous upward rally since August. The KOSPI closed at the 2350 level on the 7th after rising for five consecutive trading days, and the KOSDAQ index has also maintained its recent upward trend, rising for 10 consecutive trading days and approaching the 860 level. Analysts suggest that the market, which is rising due to abundant liquidity, is gaining momentum as it meets improvements in second-quarter earnings.

On the 8th, Meritz Securities stated that the recent domestic stock market should be understood beyond just the liquidity supplied due to the novel coronavirus infection (COVID-19), emphasizing fundamentals.

On the 6th, the KOSPI index set a new intraday high for three consecutive trading days. The photo shows the Hana Bank dealing room in Euljiro, Seoul on that day. Photo by Moon Honam munonam@

Researcher Ha In-hwan pointed out, "In a situation where the economy is not improving due to COVID-19, the phenomenon of rising stock prices might be considered 'disconnected from fundamentals,' but we need to reconsider what exactly 'fundamentals' should mean here." The phenomenon Ha emphasized is polarization.

Researcher Ha explained, "Corporate profits in Korea are concentrated in 'listed companies,' which represent the profits of the entire economy," and through data analysis since 2000, he showed that the trend of operating profits of listed companies relative to nominal Gross Domestic Product (GDP) moves similarly to the KOSPI.

He added, "In 2021, operating profits of listed companies relative to nominal GDP are expected to increase significantly," and emphasized, "If we think about fundamentals 'differently,' we can conclude that liquidity alone is not driving the current stock market rise."

He also diagnosed that important changes are underway in the KOSDAQ market. Although the bio rally continues, it is more likely to persist rather than stop.

Researcher Ha said, "The KOSDAQ is experiencing a bio rally that occurs every 2.5 years," and judged, "While the stock price level may feel burdensome, unlike previous rallies, this time profits are supporting it."

He stated, "Stock prices continue to rise, but the price-to-earnings ratio (PER) is not increasing," and added, "Not only is it not rising, but it is only at the level before the bubbles started in 2015 and 2017, so there is a high possibility of further increases in the KOSDAQ, especially in the bio sector."

According to an analysis by Hana Financial Investment, the preliminary earnings of listed companies announced so far for the second quarter amount to 22.2 trillion won, recording a surprise about 8% above the market consensus of 20.5 trillion won.

Researcher Lee Kyung-soo said, "Although the already low consensus had an effect, the fact that it exceeded expectations will be an opportunity for next quarter’s earnings estimates to rise."