[Good Morning Stock Market] "In December, Focus on New Earnings Improvement Stocks"

[Asia Economy Reporter Eunmo Koo] Earnings forecasts for domestic and international companies are being strongly revised upward. In December, a strategy focusing on new earnings improvement stories, stocks with excessive price declines, target price discrepancies, and undervaluation is analyzed to be positive while cautioning against overheated stocks.

◆Kyungsoo Lee, Researcher at Hana Financial Investment=Currently, the earnings outlook for domestic companies is very positive. The operating profit forecast for the KOSPI next year is currently 185 trillion won, revised upward from 178 trillion won at the end of September this year. Sectors such as pharmaceuticals & bio, shipping, chemicals, distribution, securities, automobiles & parts, steel, and home appliances are currently leading the upward revision of profits. Of course, due to year-end consumption expectations, the KOSPI corporate earnings forecast has shown an upward curve three times in the past four years. However, the average change was -0.2%, indicating that earnings are not always revised upward at year-end. One of the four times was in 2018, when the earnings forecast for the next year declined by 8% from early November to the end of December. Apart from the home appliances and automobile sectors, which were revised upward by 1.4% and 1.5% respectively on average at year-end, other sectors did not show a significant year-end effect.

What is important is that global earnings are currently being revised upward at a very rapid pace. Of course, global earnings also show seasonality at year-end. Over the past four years, global earnings have been revised upward by an average of 0.5% from early November to the end of December. However, the recent upward revisions have been steadily ongoing since the COVID-19 pandemic, so the year-end effect should be seen as an additional positive factor. In particular, the sharp upward revision of global materials and consumer discretionary earnings is driven by investment demand related to the 4th industrial revolution and untact (contactless) sectors.

Empirically, earnings surprises in the third quarter have been an incentive for upward revisions of next year's earnings estimates. Looking at the relationship between the third-quarter earnings surprise rates of the KOSPI and sectors (GICS mid-categories) over the past 20 years and the changes in annual operating profit estimates for the following year, a defined correlation was observed. Based on current data, the third-quarter earnings surprise can be inferred as an incentive for upward revision of 2021 earnings until March next year. Applying the trend equation, the 11% earnings surprise in the third quarter for the KOSPI is expected to have about a 17% upward revision impact on next year's operating profit (until March next year). Sectors that recorded strong earnings surprises in the third quarter and are likely to see upward revisions next year include software, shipbuilding, insurance, display, securities, food & beverage, machinery, construction, materials, durable consumer goods, and pharmaceuticals & bio.

In December, a strategy focusing on new earnings improvement stories, stocks with excessive price declines, target price discrepancies, and undervaluation is positive. This is because, over the past 10 years, these factors have shown the best performance in December due to institutional book closing and avoidance of major shareholder requirements by individuals. The recent increase in foreign net buying is also positive for this style. Based on these factors, selected stocks include HDC Hyundai Development Company, Mirae Asset Life Insurance, Hanse Industrial, Binggrae, Dongwon Industries, NAVER, Korea Technology Group, Korean Reinsurance, EcoPro, Daesang, Aju Capital, CJ, Sang-A Frontec, LG Uplus, DB Insurance, Kyungdong Navien, GS Home Shopping, Lotte Himart, S&T Motiv, Seohung, Ottogi, CJ ENM, Hyundai Home Shopping, AfreecaTV, and Hite Jinro.

◆Sangyoung Seo, Researcher at Kiwoom Securities=The Korean stock market is continuously hitting record highs. Since early this month, foreigners have been leading this trend, especially with large-scale net purchases focused on semiconductor and secondary battery sectors by active funds. This is presumed to be due to expanding expectations for the business conditions of related industries, a common feature in global stock markets. Of course, today in the U.S. stock market, Micron fell by 0.36%, indicating some profit-taking, which could increase profit-taking desires for related companies in the Korean market.

However, foreigners who had made large-scale capital outflows from emerging markets during the first and second quarters when COVID-19 was spreading are now showing inflows back into emerging markets due to a weaker dollar, expectations for strengthened free trade following Biden's election, and eased COVID-19 concerns due to vaccine development. This is expected to have a positive impact on foreign demand in the Korean stock market. In particular, the foreign funds flowing in this time have mainly targeted the Korean and Indian stock markets, and it is highly likely that these funds have been net buying mainly in the semiconductor and secondary battery sectors recently. Therefore, the behavior of foreigners has become even more important, and whether their active net buying continues is expected to influence changes in the Korean stock market today.