[KOSPI 3000] KOSPI 3000... This Time Supported by 'Earnings'

Stock Market Driven by Liquidity in 2020, Supported by Earnings in 2021
Market Waiting Funds 'Investor Deposits'... 68 Trillion Won 'All-Time High'
Q4 Earnings Up 60% YoY... Continued into Q1 This Year

[Asia Economy Reporter Oh Ju-yeon] The growing likelihood of achieving 'KOSPI 3000 and KOSDAQ 1000' this year is notable not simply because of post-COVID-19 expectations driven by vaccine and treatment developments, but because it is based on solid corporate earnings. While the KOSPI, which fell to 1400 last year, nearly doubled due to liquidity, the era of KOSPI 3000 and KOSDAQ 1000 is expected to be supported by earnings as well. The securities industry anticipates KOSPI operating profits to increase by more than 40% this year, leading to upward revisions in KOSPI forecasts.

The KOSPI surpassed the 3,000 mark for the first time in history. On the 6th, the KOSPI index opened at 2,993.34, up 2.77 points (0.09%) from the previous trading day (2,990.57), and during the session, it crossed the 3,000-point threshold. This is the first time the KOSPI has exceeded 3,000 points since it first broke through 2,000 on July 25, 2007, approximately 13 years and 5 months ago. The photo shows the Hana Bank dealing room in Jung-gu, Seoul, on that day. Photo by Kim Hyun-min kimhyun81@

◆ A Bull Market Driven by Liquidity = On March 19, 2019, the KOSPI plunged intraday to 1439.43 due to the impact of COVID-19, but closed at 2873.47 on December 30, nearly doubling in about nine months. The possibility of opening the KOSPI 3000 era in the new year of 2021 was a result of individual investors’ active participation in the stock market, fueled by abundant liquidity.

According to the Korea Financial Investment Association on the 6th, investor deposits, which are standby funds for the stock market, exceeded 68.28 trillion won as of the 4th, setting a new record. Considering it was 27 trillion won in January last year, this represents a 2.5-fold increase. The average daily trading value of the KOSPI last year reached a record high of 11.9 trillion won, up 115.2% from the previous year. On the 5th, when the KOSPI surpassed the 2990 mark, the trading value was 26.2636 trillion won, breaking the previous record of 25.0114 trillion won set the day before.

It is no exaggeration to say that this market was driven by individuals. In the KOSPI market, the average daily trading value by individuals last year was 8 trillion won, an increase of about 5.7 trillion won from 2.37 trillion won in 2019, and their trading share surged from 47.5% to 65.8%, creating a unique scene where individuals, not foreigners or institutions, led the market.

In the KOSDAQ market, the average daily trading value by individuals increased by 5.9 trillion won to 9.5 trillion won compared to the previous year, and their trading share expanded from 84.7% to 88.2%. This reflects heightened interest in stock investment among individuals amid a low-interest-rate environment, as well as active bottom-fishing by individuals who learned from past crises such as the IMF foreign exchange crisis and the 2008 financial crisis.

◆ KOSPI 3000 Era Supported by Earnings = This year, earnings will join liquidity to support the KOSPI 3000 level. Last year, there was a divergence as the stock market rose despite the real economy worsening due to COVID-19, but this year, corporate earnings are expected to improve as the economy normalizes. Moreover, overlapping cycles in semiconductor and non-semiconductor sectors may lead to an unprecedented boom, attracting attention.

According to financial information provider FnGuide, operating profits of 259 listed companies estimated by three or more securities firms for the fourth quarter of last year are expected to increase by 60.01% year-on-year to 35.9362 trillion won. In the fourth quarter of 2019, these companies’ operating profits were 22.4584 trillion won.

Including 26 companies turning profitable and 3 companies reducing losses, a total of 184 companies (71.04%) are expected to improve operating profits in the fourth quarter of 2020. This means that 7 out of 10 companies will have improved fundamentals compared to the previous year.

The sectors with the most remarkable operating profit growth are secondary batteries, chemicals, and electrical equipment. LG Chem and Samsung SDI are expected to post operating profits of 812.8 billion won and 318.1 billion won respectively in the fourth quarter of last year, representing increases of 4200.1% and 1480.5% year-on-year. As expectations for the expansion of the electric vehicle market rise, the secondary battery sector was also the one that investors lifted stock prices from the first trading day of the new year in 2021. On January 4, the first trading day of the year, LG Chem and Samsung SDI’s intraday stock prices rose to 900,000 won and 682,000 won respectively, setting new 52-week highs.

Samsung Electronics, the most purchased stock by individual investors last year, is expected to see its fourth-quarter operating profit increase by 39.0% year-on-year to 9.9512 trillion won.

This earnings growth trend is likely to continue into the first quarter of this year. The operating profit estimate for 142 listed companies in the first quarter, estimated by three or more securities firms, is 34.4161 trillion won, up 59.68% from 21.5527 trillion won in the first quarter of last year. Among them, 107 companies are expected to increase operating profits year-on-year, and including 12 companies turning profitable and 3 reducing losses, 85.92% of the total are expected to improve earnings.

Accordingly, earnings estimates for domestic KOSPI-listed companies are being revised upward this year. The securities industry expects KOSPI operating profits to reach 184 trillion won and net profits to reach 134 trillion won this year. Hana Financial Investment estimates net profits of KOSPI-listed companies to reach 160 trillion won, a 45% increase from the previous year, slightly higher than others, while KB Securities raised its KOSPI net profit estimate from 120 trillion won to 135.6 trillion won. The 'semiconductor super cycle' and 'profit growth in cyclical industries' due to a weak dollar are cited as major factors.

According to KB Securities, in the past 20 years, KOSPI operating profits surged by more than 30% only three times?in 2004, 2010, and 2017?and the commonality was that operating profits of both the semiconductor sector and non-semiconductor sectors increased simultaneously. Typically, semiconductors and economically sensitive sectors have opposite cycles, so simultaneous profit increases are rare. However, faster-than-expected vaccine distribution has accelerated the semiconductor super cycle, originally expected in the second quarter, and the recent dollar weakness has led to higher commodity prices and stronger emerging market currencies, raising profit estimates for economically sensitive and domestic sectors.

KB Securities researcher Lee Eun-taek said, "Another common point in 2004, 2010, and 2017 was that earnings estimates were revised upward throughout the first half of the year," adding, "Considering that the increase was 17-20% in all three cases, the current KOSPI earnings estimates are more likely to be revised upward further rather than being overly optimistic and causing a shock."

◆ Securities Firms’ Forecasts Continue to Rise = Securities firms’ KOSPI forecast bands for this year are also surpassing 3000 points. Especially, with the stock market’s unstoppable rise from the first day of the new year, the upper limit of the KOSPI continues to be revised upward.

Samsung Securities raised its KOSPI forecast from 2100-2850 to 2700-3300 this year. It expects KOSPI operating profits to reach 218 trillion won in 2022, surpassing the historical high of 197.4 trillion won in 2018, the peak of the semiconductor super cycle, suggesting the stock market is pricing this in advance. Oh Hyun-seok, head of Samsung Securities Research Center, said, "The reflationary policy environment (expansionary fiscal policy + accommodative monetary policy) of major countries, the rush of COVID-19 vaccine and treatment development and inoculation, and the rapid normalization of Korean export economy and corporate earnings based on semiconductor and China macro recovery are positive factors for the stock market."

Shinhan Financial Investment also raised the upper limit of the KOSPI this year from 2700 to 3300, analyzing that corporate value growth is expected mainly in new growth industries. From August 2004 to July 2007, the KOSPI rose 171% led by energy, materials, and industrial sectors, during which the 12-month forward price-to-earnings ratio (PE) of the KOSPI increased from 5.6 to 13.0, significantly narrowing the global gap. Currently, the value of Korea’s new growth industries is about 88% compared to the global level, and this gap is expected to narrow. Yoon Chang-yong, head of Shinhan Financial Investment Research Center, said, "Profitability of Korean growth industries has improved since 2019," and "The KOSPI is expected to peak between the end of the first quarter and the second quarter."

KB Securities also raised the upper limit of the KOSPI to 3300 this year, while Meritz Securities and Hana Financial Investment set it at 3200. Shin Dong-jun, head of KB Securities Research Center, said, "Although some profit-taking may occur after the KOSPI surged about 30% since last November, the preference for risky assets is expected to continue due to liquidity, earnings, vaccines, and stimulus expectations."