[Good Morning Stock Market] Reasons Why Leading Stocks Appear Diversely in the Market

[Asia Economy Reporter Eunmo Koo] Recently, the market has seen a more diverse range of leading stocks than ever before. Unlike in the past when leading stocks emerged according to economic cycles, it is now analyzed that leading stocks arise based on structural changes in industries. Additionally, the increase in profitable growth stocks is also cited as a reason for the diverse emergence of leading stocks.

◆Jinwoo Lee, Researcher at Meritz Securities=It seems that responding to individual stocks is particularly difficult in this market compared to indices. Leading stocks are no exception. This is because the range of industries and stocks is broad, including IT software companies like Naver and Kakao, electric vehicles and secondary batteries, and bio contract manufacturing organizations (CMO). Considering that leading stocks were traditionally referred to as specific industries and a few stocks, this period may feel unfamiliar. It is also different from the intuitive explanations seen in 2010 with cars (Cha), chemicals (Hwa), and refining (Jeong), in 2012 with consumer goods (low-cost consumption + Chinese consumption), and in 2017 with the semiconductor rally.

There are two main reasons. First, this time’s leading stocks are not derived from cyclical economic flows but from structural changes in industries. In the past, leading stocks emerged reflecting the boom in the respective industries, but that is no longer the case. Since it does not reflect the cycle of business conditions, the correlation between industries is also low. Second, there are more profitable growth stocks. During the IT bubble, growth stocks had high growth potential but did not generate profits, which was a limitation. Now, many companies generate strong profits based on platform dominance. This is also why there are an unprecedented number of mega growth stocks in the U.S. This phenomenon is difficult to explain by simple business cycle logic.

For example, Amazon’s net income in 2015 was only about $600 million, which was just 1.1% of Apple’s net income at the time. However, Amazon’s net income is expected to surge 83-fold to $22.7 billion next year, reaching 35.2% of Apple’s net income (Apple’s net income forecast is $64.6 billion). In just six years, Amazon has created remarkable profits. At this rate, it seems that the time when Amazon earns more money than Apple is not far off.

If Amazon is now in a phase of making significant profits, online platform companies like Shopify and Tesla are just beginning to turn profitable. Tesla had maintained a net loss trend since 2007 until last year, but it is expected to start its first turnaround this year with a net income forecast of $2.2 billion next year. This is also the difference between growth stocks with good stock performance and those without. In the short term, the stock market may experience extended volatility as it resolves concentration and overheating. However, it is not expected to threaten the trend of the bull market. When selecting industries and stocks, companies with ‘visibility’ of growth seem to be the right choice.

◆Sangyoung Seo, Researcher at Kiwoom Securities=On the 26th, the Korean stock market experienced high volatility due to news related to the third stage of social distancing. Especially amid concerns about the resurgence of COVID-19, if the third stage of social distancing is implemented, it is estimated that investment sentiment will inevitably deteriorate, causing significant changes. Under stage 3, all activities except essential social and economic activities are basically prohibited, public institutions will have all employees except essential personnel work from home, and private companies are recommended to follow this policy. Since social activities themselves are halted, it is an unavoidable difficult choice. Therefore, the market is expected to continue reacting sensitively to announcements of new COVID-19 cases and news related to the third stage of social distancing today.

Meanwhile, the U.S. stock market shows strength only in some momentum stocks, while other stock groups are experiencing severe differentiation and weakness. This is expected to affect the Korean stock market as well, as there is a high possibility of concentration on stocks that have shown recent upward trends. Meanwhile, U.S.-China tensions are showing different patterns day by day. This time, in response to a U.S. reconnaissance aircraft entering China’s no-fly zone, China fired a medium-range missile, and the U.S. announced sanctions on Chinese companies and individuals related to the South China Sea. As a result, the yen has strengthened, reflecting increased safe-haven demand, which is a burden. Considering these factors, the Korean stock market is expected to show weakness except for some stocks with significant concentration.