[Good Morning Stock Market] 4th Wave and Investment Sentiment Decline... Focus on 'Bargain Appeal' Rather Than 'Excessive Worry'

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] The domestic stock market is being affected by the fourth wave of COVID-19. As investor sentiment contracts, market volatility is expected to increase. However, upward revisions in corporate earnings for Q2 and favorable economic indicators are anticipated to support the lower bound of the KOSPI.

◆ Seojung-hoon, Researcher at Samsung Securities = Due to the concurrent stock price correction and depreciation of the Korean won, the KOSPI on a dollar-converted basis is showing oversold signals in technical indicators. This is considered a zone where rebound buying pressure can sufficiently flow in.

Valuation is also not a burden. The price-to-earnings ratio (PER) based on MSCI KOREA is around 11 times, similar to when the KOSPI hovered around the 2500 level in November last year. Excessive concerns about downside are not practical. Considering that the intense battle between reflation and disinflation may continue for some time, rotation between sectors and styles is expected to persist. In portfolio construction, a diversification strategy rather than concentration in specific areas will be effective. As the earnings season is approaching, the importance of quality factors is expected to become more prominent. Along with this, it will be necessary to preemptively buy large-cap stocks that have experienced concentrated foreign selling and have traded sideways for a long period.

◆ Chae Hyun-gi, Researcher at Cape Investment & Securities = Despite Samsung Electronics and LG Electronics posting solid Q2 earnings, their stock prices closed lower due to uncertainty about future earnings. Since market expectations for Q2 earnings were already high, it is difficult to expect further price increases for stocks that recorded strong Q2 results. The market focus is on Q3 and beyond, so attention should be paid to whether Q3 earnings improve. Among the 26 KOSPI sectors, the sectors with the highest consensus for Q3 operating profit compared to Q2 are IT hardware (+65%), semiconductors (+35%), and media & education (+33%). However, since Q2 earnings for IT hardware are expected to be lower than the previous quarter, it is necessary to select stocks with strong earnings in both Q2 and Q3. It is judged that it will be difficult for leading sectors or styles to emerge during the Q2 earnings season. As the tapering timing approaches, it is time to monitor the 10-year bond yield trend and consider whether rotation into growth stocks will occur.

◆ Kim Dae-jun, Researcher at Korea Investment & Securities = Recently, the KOSPI has continued to weaken. The index, which had risen to the 3300s, fell for two consecutive weeks and temporarily dropped below 3200 last Friday. This reflected concerns about economic slowdown due to the resurgence of COVID-19 and price burdens at the peak. Since risk factors have not been completely resolved, worries about further declines remain.

However, excessive concerns should be cautioned against. Although the delta variant is spreading worldwide and new cases are increasing domestically, the environment is not as defenseless as in Q1 last year. Even if there is temporary disruption like during the 2nd and 3rd waves, there is a possibility of overcoming the crisis. The market is judged to have a low probability of being exposed to a trend price correction. The good news from overseas last week is also expected to positively affect the stock market. China's monetary easing and the rebound of the U.S. stock market could revive the risk asset preference that has been shrinking. I believe the stock market this week can start higher with such expectations, unlike before.

First, it is necessary to look at the U.S. stock market last week. On the 9th local time, all three major New York indices closed higher. In particular, the Dow Jones Industrial Average, which has a higher proportion of cyclical stocks, rose more than the Nasdaq, which is tech-heavy. This can be interpreted as the market focusing on the overall economic recovery potential rather than individual momentum stocks.

Also, the fact that fear sentiment in the stock market is close to a short-term bottom is noteworthy. Except for the initial spread of COVID-19 in March last year and around the U.S. presidential election in November, the current fear sentiment level has sufficiently declined. If additional positive factors emerge, sentiment is likely to improve rapidly. The dollar index may also respond by reversing into a downtrend. Expectations for stimulus from China are expected to be favorable for risk asset preference. The reason the KOSPI has not been significantly shaken so far is due to the increasing trend in earnings estimates, and the recovery of economic momentum is likely to be added soon. In this case, the bearish pressure that has pervaded the market overall will weaken, and the index's decline so far is likely to narrow.

In this process, tactical responses to increase expected returns are necessary. First, focus on sectors with increased valuation appeal due to lower stock price levels. Also, it is important to check whether upward revisions of earnings estimates continue. Sectors meeting these conditions are mostly cyclical sectors such as transportation, energy, chemicals, and steel. Since cyclical sectors have undergone larger corrections compared to tech stocks, their low price appeal is sufficient. Moreover, with the possibility of some changes in China's policy direction toward stimulus, the potential for a rebound has increased. This week, it is necessary to consider increasing investment weight centered on cyclical sectors, keeping these environmental changes in mind.