[Good Morning Stock Market] Amid Concerns Over COVID-19 Spread... Attention on 'Earnings Improvement Stocks'

Rapid Surge in COVID-19 Cases... Consecutive Days with Over 300 Cases
US Reports Average of 160,000 New Cases Daily Over 7 Days

KOSPI Holds Above 2500... 'Short-Term Overheating Zone'
KOSPI Market Companies' Q3 Net Profit Up 46%
"Focus on Companies Expected to Improve Performance by First Half of Next Year"

[Asia Economy Reporter Minji Lee] Concerns over the prolonged COVID-19 pandemic are rising worldwide, as the number of confirmed cases of the novel coronavirus infection (COVID-19) is rapidly increasing in South Korea. In the United States, an average of 160,000 new cases per day over the past week has sparked pessimism that the labor market may deteriorate.

Amid this situation, the market is evaluating that the KOSPI has entered a short-term overheating zone, maintaining the 2,500 level. At this point, it is considered effective to focus on stocks with improving earnings that are expected to deliver stable results until the first half of next year.

◆ Sangyoung Seo, Kiwoom Securities Researcher = The U.S. stock market started lower due to the spread of COVID-19 and weak employment data, but buying interest flowed mainly into companies based on the untact (contactless) environment, leading the Nasdaq index to rise. News of the resumption of stimulus negotiations between the Republican and Democratic parties and expectations for the Federal Reserve were reflected, and major indices on the New York Stock Exchange expanded their gains toward the close. Earlier, Dallas Fed President Kaplan hinted at additional Fed stimulus by stating that bond purchases and maturity extensions are being considered.

However, the unstable labor market due to the prolonged COVID-19 pandemic remains a concern. Recently released initial jobless claims increased from 711,000 to 742,000. The COVID-19 impact is spreading to the labor market, and as cases rise sharply, some U.S. states and cities are strengthening lockdown measures. New York City, which announced school closures, has now announced it will impose indoor business suspensions, such as at banquet halls, within one to two weeks. Some Republican governors have also indicated that they may strengthen economic lockdowns due to the significant spread of COVID-19.

Currently, the seven-day average of new COVID-19 cases in the U.S. is 161,165 per day, about a 26% increase compared to a week ago. The daily death toll is approaching 2,000, with total deaths exceeding 250,000, indicating growing COVID-19 damage. The government is paying attention to the impact of Halloween and expects a further surge during Thanksgiving.

◆ Mingyu Kim, KB Securities Researcher = Corporate earnings in the third quarter have returned to a growth phase. Stock prices are reflecting this. Now, attention should be paid to stocks whose earnings will turn positive from the fourth quarter and first quarter onward.

To summarize third-quarter corporate earnings: ‘Entering recovery.’ KOSPI profits escaped seven consecutive quarters of decline through the second quarter, with operating profit increasing by about 28% and net profit by about 46% compared to the third quarter of last year. Earnings growth was led by some cyclical industries such as chemicals, non-ferrous metals, construction, and machinery, as well as healthcare and IT. However, consumer discretionary sectors still have not escaped earnings decline, and KOSPI sales decreased by 3% due to the impact of energy, industrials, and consumer discretionary sectors.

The earnings growth in the third quarter was a surprise, exceeding expectations by about 10%. The second quarter also showed surprising results but of a different nature. The second-quarter surprise occurred as forecasts were lowered, so the results were better than the reduced expectations, whereas the third quarter’s results appeared as forecasts were raised.

Surprise stocks were mainly large-cap stocks with many forecasts through reports. The more stocks a person is responsible for, the more burden there likely was in issuing forecasts that differed from market estimates. Moreover, due to COVID-19, earnings uncertainty increased, so there were many factors to consider when adjusting earnings forecasts this year.

Stock prices are responding mainly to stocks that hit earnings bottoms in the first half of the year. The focus has shifted from growth stock buying to stocks with improving actual earnings. Investment is increasing in stocks whose sales and operating profits have turned from decline to growth. Judging by corporate growth rates, earnings-focused investment strategies are expected to be effective from early next year through the second quarter. In conclusion, attention should be heightened on stocks such as Lotte Chemical, Huchems, POSCO, Daewoo Construction, and SK Networks, which are expected to return to earnings growth from the fourth quarter and first quarter onward.