[Good Morning Stock Market] US Profit-Taking Desire 'Taking a Breather'... "The Trend Has Not Broken"

The KOSPI index closed at 3,140.31 on the 26th, down 68.68 points (-2.14%) from the previous trading day. The KOSDAQ index closed at 994.00, down 5.30 points (-0.53%) from the previous trading day. Photo by Korea Exchange

[Asia Economy Reporter Lee Seon-ae] The three major indices of the U.S. New York stock market entered a pause ahead of the earnings announcements of major tech companies and the Federal Open Market Committee (FOMC) meeting results. On the 26th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 30,937.04, down 22.96 points (0.07%) from the previous day. The S&P 500 index fell 5.74 points (0.15%) to 3,849.62, and the tech-heavy Nasdaq index dropped 9.93 points (0.07%) to 13,626.06. Analysts attribute this to the level burden after continuous rises, including the S&P 500 and Nasdaq hitting record closing highs the previous day, and increased recent volatility prompting investors to realize profits. Now, attention is shifting to major tech stocks such as Apple, Tesla, and Facebook, which are about to release earnings, as well as the first FOMC meeting. There is keen interest in whether strong earnings from major tech companies will act as a catalyst for further gains. The domestic stock market is also experiencing increased volatility, but the prevailing analysis is that the trend has not yet been broken.

◆ Hainhwan KB Securities Researcher= The characteristics of the market decline on the 26th include two main points: the decline was seen not only in Korea but across Asia, and the drop in the KOSDAQ was limited. First, Asian markets broadly declined. While the short-term correction in mid-January saw Korea's market fall more sharply than others, this decline was observed across Asia. Notably, the drop in the Hong Kong market was larger than that of the KOSPI.

Next, there is a significant difference in the decline between the KOSPI and KOSDAQ. The causes of the decline were influenced by news from the U.S. and Europe as well as China. First, there was news of setbacks in the distribution of the COVID-19 vaccine. Additionally, lockdown announcements from European countries negatively affected investor sentiment. On top of this, concerns were reflected that the passage of the U.S. stimulus package could be delayed for a considerable period.

Second, the global stock market is currently very sensitive to liquidity withdrawal. While this is usually centered on the U.S. Federal Reserve, continuous monitoring of China is also necessary. Since China's economic normalization is faster than that of the U.S., it is likely that monetary policy normalization will also occur sooner in China. From this perspective, attention should be paid to the People's Bank of China's liquidity supply. The timing of the mid-January correction and the current correction coincides with a sharp decline in the People's Bank's reverse repo purchase volume. In mid-January, concerns about liquidity were eased by net supply of MLF, so it is necessary to confirm the People's Bank's liquidity supply now as well. The conclusion is that this will be a short-term correction, and it is judged that the decline will not exceed that of mid-January.

◆ Kim Dae-jun Korea Investment & Securities Researcher= The U.S. plans to implement stimulus measures based on Yellen's high-pressure economy. If the policy proves effective, the U.S. economy will recover, and the Korean economy will benefit directly and indirectly. Accordingly, the stock market is expected to show a gentle upward trend after a brief correction, and the trend is unlikely to be broken as long as steep interest rate hikes and the resumption of domestic short selling can be avoided. As in January, an increase in the proportion of cyclical stocks is recommended. The KOSPI band for February is expected to be between 3,000 and 3,300. Based on the Korea Investment & Securities universe, this corresponds to a 12-month forward price-to-earnings ratio (PER) of 13.9 to 15.3 times and a 12-month forward price-to-book ratio (PBR) of 1.22 to 1.35 times.

With the start of the fourth-quarter earnings season, attention to profits has increased. Valuation pressure also encourages focus on fundamentals. In particular, it is necessary to pay attention to sectors with strong earnings upgrades. The larger the consensus upward revision before earnings announcements, the higher the probability of an earnings surprise and the greater the expected return. We continue to recommend increasing exposure to cyclical sectors such as displays, where earnings upgrades have been rapid recently, and materials, which have relatively favorable earnings momentum.