[Weekly Market Outlook] A Fiercely Rising Market: Is It Really a Liquidity Bubble?

KOSPI Net Profit Expected to Increase by Over 40% Year-on-Year
In Q1 This Year, 8 out of 10 Listed Companies Forecast Operating Profit Improvement
"KOSPI Profit Improvement Eases Valuation Pressure, Expands Upside Potential"

Daishin Securities, "KOSPI 3000 Era, Not the End but the Beginning"

[Asia Economy Reporter Oh Ju-yeon] From the first week of the new year, the KOSPI quickly surpassed the 3150 mark, far exceeding the numbers some securities firms had projected as the upper limit for this year’s KOSPI. Investor deposits, a form of market standby funds, are approaching 70 trillion won, reaching an all-time high, and the number of new securities accounts opened since the first week of the year has surged, with daily new account openings hitting record highs across securities firms. While some express concerns about the burden and fatigue caused by the sharp rise, and others view the market as a liquidity bubble, an analysis based on the profit improvement trends of KOSPI-listed companies in 2021 and 2022 suggests that the pressure from rising stock values will ease, drawing attention.

According to the securities industry on the 10th, KOSPI net profits are expected to increase by more than 40% this year. Hana Financial Investment estimates that the net profits of KOSPI-listed companies will reach 160 trillion won, a 45% increase compared to the same period last year, while KB Securities raised its KOSPI net profit estimate from 120 trillion won to 135.6 trillion won.

This improvement in earnings is expected to have already been confirmed since the fourth quarter of 2020. According to financial information provider FnGuide, the operating profits of 259 listed companies estimated by three or more securities firms for the fourth quarter of last year are projected to be 35.9362 trillion won, a 60.01% increase compared to the fourth quarter of 2019 (22.4584 trillion won).

Operating profits for the first quarter of this year are also expected to increase similarly. The estimated operating profits of 142 listed companies for the first quarter of 2021 are 34.4161 trillion won, a 59.68% increase compared to 21.5527 trillion won in the first quarter of 2020. Among these, 107 companies are expected to see increased operating profits compared to the same period last year, and including companies that turned profitable (12 companies) or reduced losses (3 companies), 85.92% of the total are expected to improve their performance.

Daishin Securities analyzed that the consensus on KOSPI companies’ profits for 2021 and 2022 has already entered an upward revision cycle. According to the analysis data, during the upward revision phase of profit forecasts from 2016 to 2018, the confirmed net profits of KOSPI companies in 2017 and 2018 were 12.6% and 6.85% higher, respectively, than the consensus in November 2016. For 2021 and 2022, changes in the environment such as the global manufacturing sector’s recovery and improvements in Korean exports are reflected in earnings, suggesting that the future trend of corporate profit forecasts will proceed similarly to 2017.

Since November last year, earnings per share (EPS) forecasts for 2021 and 2022 have already been revised upward by 2.5% and 4.9%, respectively.

Lee Kyung-min, a researcher at Daishin Securities, stated, "During the economic downturn caused by the COVID-19 pandemic, unprecedentedly strong policies and liquidity momentum were injected, and this year, economic recovery, earnings improvement, and the effects of policies and liquidity are expected to be reflected."

Additionally, the net profit growth rate in 2017 reached 47.6% compared to 2015, and the 12-month forward EPS rose 55.9% from its low point. Based on the current consensus, the net profit growth rate from 2020 to 2022 is expected to reach 74%. According to the researcher, even with the current profit levels, the 12-month forward EPS is expected to level up and set a new all-time high.

The researcher added, "If the 12-month forward EPS reaches a record high of 283 points, the KOSPI at 3000 corresponds to a price-to-earnings ratio of only 10.6 times," and forecasted, "Although the index level is the same, the rise in earnings forecasts alone will not only relieve valuation pressure but may also increase valuation attractiveness."