Domestic Stock Market Still Moves... Look at the Top Sectors with Profit Momentum

IT Appliances, Energy, Automotive, IT Hardware, Banking

[Asia Economy Reporter Lee Seon-ae] Although the domestic stock market may undergo a short-term correction, experts generally expect it to continue its upward trend. Accordingly, investment advice has been raised emphasizing the need to focus on sectors with the best profit momentum.

Following the June meeting of the U.S. Federal Open Market Committee (FOMC), a hawkish stance from the Federal Reserve (Fed) was detected for the first time since the COVID-19 crisis, with discussions beginning on tapering (reducing asset purchases) and an accelerated timeline for interest rate hikes. This has increased market anxiety about tightening. However, Seongcheol Lim, a researcher at Heungkuk Securities, stated on the 19th, "Since the vaccine effects are appearing rapidly and the Fed's stance change focuses on a faster-than-expected economic recovery due to active fiscal stimulus, this may provide a pretext for short-term stock market corrections but is unlikely to cause a trend reversal."

Alongside the global economic recovery, South Korea is also showing a continuous rise in the KOSPI 12-month forward earnings per share (EPS) based on strong exports. The current 2021 operating profit and net profit consensus stand at approximately KRW 217.8 trillion and KRW 177.1 trillion, respectively, both steadily trending upward over the past year.

The market is expected to grow cautious about upcoming employment and inflation data releases until the August Jackson Hole meeting and the September FOMC, in response to the Fed’s stance change. Consequently, market interest rates, which had been declining in the second quarter, are likely to face renewed upward pressure. Given the KOSPI’s continuous rise over the past eight months, a short-term correction phase may occur amid this increased volatility.

However, considering the absolute fact that historically, stock markets have performed well during periods of rising interest rates (average return: 18.6%, probability of increase: 80.0%), that the current environment is based on recovery and profit growth rather than recession, the Fed’s efforts to mitigate market shocks, and that concerns about tightening have been partially priced in, it is highly likely that the stock market will continue its upward trajectory through a correction process.

Researcher Lim emphasized, "Market interest rates are expected to continue facing upward pressure, and since profit growth is more essential than ever, interest in earnings is likely to be high. It is necessary to focus on sectors that have performed relatively well during past 20 years of rising interest rate phases and those currently showing strong profit momentum."

During periods of rising interest rates, sectors that showed overall absolute gains and outperformed the KOSPI on average include IT home appliances (+19.8%), software (+17.2%), energy (+15.5%), semiconductors (+13.7%), automobiles (+13.4%), shipbuilding (+12.7%), chemicals (+12.5%), IT hardware (+11.3%), and steel (+10.0%). Conversely, sectors such as telecommunications services (-17.3%), utilities (-14.3%), media (-6.4%), hotels and leisure (-5.0%), and consumer staples (-4.1%) underperformed.

Meanwhile, based on absolute profit growth this year and next, as well as consensus changes over the past one and three months, sectors showing better performance compared to others include energy, trading & capital goods, automobiles, cosmetics, media, banking, IT hardware, IT home appliances, and telecommunications services.