[Weekly Market Outlook] December, the Market is on Fire... Will It Keep Rising Despite Increased Fatigue?

[Asia Economy Reporter Oh Ju-yeon] As the year-end of 2020 approaches, the domestic stock market has surpassed the 2600 mark, continuously hitting new highs. Despite a widespread assessment that the market is experiencing fatigue after rising more than 15% in November alone, the KOSPI quickly surpassed 2600 and even broke through the 2640 level during trading on the 25th. Analysts note that this is different from August, when the index surged to the 2450 level before falling back to 2270 due to a short-term overheating correction.

Source=Korea Exchange

Hana Financial Investment projected the KOSPI range for the first week of December to be between 2580 and 2660. Although valuations have risen, unlike in August, the stocks driving the index increase are not concentrated in specific sectors.

Lee Jae-sun, a researcher at Hana Financial Investment, stated, "The current atmosphere is quite different from the previous August when a sharp decline occurred due to overheating," adding, "At that time, the overheating was driven by the dominance of tech stocks, whereas now many companies are participating in the rally." He analyzed that since September, the S&P 500 equal-weighted index (10.1%) has outperformed the market-cap weighted index (1.4%).

Lee also said, "The market sentiment remains risk-on," and added, "Expectations for global economic recovery continue to support record highs in prices of non-ferrous metals such as copper, so during a healthy correction phase that cools overheating, a strategy of additional buying on dips is advantageous."

There is also analysis emphasizing the need to closely monitor foreign investors' supply and demand, as they have been leading the recent stock market. Foreign investors have net purchased more than 7.4 trillion won in the KOSPI market since November. Except for July, they had consistently been net sellers every month since the outbreak of COVID-19, but in November, they have maintained a continuous net buying streak. Given the increased pressure on the KOSPI's rise, it is important to understand how foreign investors view the current level, drawing attention.

IBK Investment & Securities noted that foreign investors have continued their supply and demand in the KOSPI market, supported by favorable factors such as the COVID-19 situation, international affairs, and exchange rate conditions. However, if they begin to feel the burden of overvaluation in the domestic stock market, strong buying momentum may weaken.

An So-eun, a researcher at IBK Investment & Securities, explained, "Looking at the ratio of KOSPI market capitalization to GDP and foreign investor flows, every time this ratio exceeded +1 standard deviation of the long-term trend, foreign investor flows turned negative," adding, "In 2008, when the ratio exceeded +2 standard deviations as it does now, there was a special circumstance of the global financial crisis, resulting in significant selling."

An predicted, "Since the KOSPI has entered an unexperienced territory, a pause phase to assess the appropriateness of the current level is expected."

NH Investment & Securities forecasted that the KOSPI will move between 2560 and 2660 next week. While the easing of risks related to the U.S. Democratic Party's corporate regulations and expectations for COVID-19 vaccine development are positive factors, the high valuation of the KOSPI is considered a negative factor.

NH Investment & Securities explained that the earnings outlook for KOSPI companies is favorable, with profits expected to rise from 88 trillion won in 2020 to 128 trillion won in 2021 and 147 trillion won in 2022. Considering the favorable liquidity environment, the current KOSPI index hovering around 2600 fully reflects the 2021 earnings outlook, and for further gains, the 2022 earnings outlook must be priced in ahead of time. This implies a valuation burden, which could partially restrain additional index increases.

In the short term, positive factors are stronger, potentially exerting upward pressure on the stock index, but as the year-end approaches, attention to previously hidden uncertainties may increase.

Kim Young-hwan, a researcher at NH Investment & Securities, advised, "Rather than predicting and responding to the direction of the stock index, it is better to adopt a strategy of holding relatively undervalued stocks benefiting from economic recovery," citing the semiconductor, chemical, and transportation sectors.