[The Era of Ultra-Tightening] Different from the Past Rate Hike Period... "Avoid the Storm with Earnings Stocks"

Index Rises Every Time Interest Rates Increase
Strong Corporate Earnings Support Growth

This Year KOSPI Operating Profit 252 Trillion Won... Up 9%
Growth Rate Smaller Compared to Last Year's 62%
May Not Drive Stock Market Rally This Year

[Asia Economy Reporter Minji Lee] Despite the fear of rising interest rates weighing heavily on the market, the KOSPI in the past showed an upward trend even after interest rate hikes. During each period of rate increases, strong corporate earnings momentum offset concerns about liquidity tightening, driving the index higher. However, this year is different from the past. Growth is expected to slow down. Supply chain disruptions and rising raw material costs are deepening companies' worries.

According to financial information provider FnGuide on the 11th, KOSPI-listed companies are expected to earn operating profits of 252 trillion won this year. This is about 9% (20 trillion won) higher than the 231 trillion won forecast for 2021. Although corporate profit growth is expected to continue this year, considering that profits last year increased by 62% compared to 2020 (142 trillion won), the growth rate is estimated to slow significantly.

What supported KOSPI's rise during past interest rate hike periods was the solid performance of companies. This is evident even in the most recent case of the 2016-2018 rate hike phase. The first rate hike after the 2008 financial crisis occurred in December 2015. From the end of 2016, the rate hike cycle began in earnest, with the U.S. Federal Reserve (Fed) raising the benchmark interest rate to 2.5% by December 2018. At that time, the S&P 500 index rose more than 11%, from 2257.83 to 2506.85, thanks to companies showing steady growth of around 3% each quarter. Domestic KOSPI-listed companies also recorded operating profits of 147 trillion won in 2016, which grew to 197 trillion won the following year, a 30% increase. The KOSPI's annual rise approached 22%.

Concerns are growing that the stock market's upward momentum may weaken as corporate growth is expected to slow this year. The reason for the expected slowdown in corporate earnings is costs. Despite the COVID-19 pandemic in the previous two years, companies quickly recovered from the economic downturn, but this year, issues such as supply chain disruptions have prolonged inflation, raising concerns about rising costs. In fact, the Global Supply Chain Pressure Index published by the Federal Reserve Bank of New York (a monthly index combining global maritime and air freight rates and key countries' PMI sub-indicators such as delivery times, order backlogs, and inventories) surged more than 115%, from 1.97 in January last year to 4.25 in December. Although there is some expectation that supply chain issues will gradually ease, disruptions remain at a higher level compared to the past. Lee Kyung-min, a researcher at Daishin Securities, analyzed, "The KOSPI will enter a secondary downtrend as economic instability intensifies amid monetary policy burdens. As the Q4 earnings of KOSPI companies have been weak and Q1 earnings forecasts for this year are being revised downward, earnings anxiety is spreading throughout the market."

Securities experts advise that, given the slowdown in growth rates, it is advisable to respond with a strategy focused on sectors with strong earnings and attractive valuations, particularly low PER (price-to-earnings ratio) sectors, when the KOSPI fluctuates. During periods of interest rate hikes and growth slowdown, discount rate burdens on growth stocks may increase, so to limit downside, it is necessary to focus on large-cap stocks such as semiconductors and automobiles. Roh Dong-gil, a researcher at Shinhan Financial Investment, said, "In the second half, which is actually a phase of asset reduction, stocks with low PER, whose expected earnings are nearer, will relatively outperform due to liquidity contraction."