[Practical Finance] Industry Outlook for the Second Half: 'Jeoncha Corps Clear Skies'... Fill Your Basket with Earnings Stocks

[Asia Economy Reporter Lee Seon-ae] In the stock market during the first half of this year, which was filled with various adverse factors, technology growth stocks took a hit. Concerns over tightening, such as the U.S. Federal Reserve's (Fed) big step (a 0.5 percentage point hike in the base interest rate at once), triggered capital outflows from emerging markets, leading to a decline in corporate value centered on large-cap stocks. However, the most promising sectors for the second half of the year, as identified by major securities firms, are semiconductors and automobiles. The 'Jeon (semiconductor)·Cha (automobile) corps' were presented as the sectors with the highest profit growth expected next year. The promising stocks are undoubtedly performance stocks that can generate profits within these sectors. This is based on the judgment that stocks with excessively long profit recovery periods lose appeal during the Fed's tightening process.

Focus on Semiconductors and Automobiles

According to the financial investment industry on the 26th, the sectors that did not miss being named as promising for the second half by domestic securities firms were semiconductors and automobiles. In the case of semiconductors, a stable supply-demand environment is expected to continue in the second half, enabling profit generation, and automobiles are expected to maintain solid waiting demand amid supply shortages.

Meritz Securities selected semiconductors, automobiles (finished cars), retail/distribution (department stores), and hotels/leisure as promising sectors for the second half. Researcher Lee Jeong-yeon of Meritz Securities explained, "The sectors currently possessing pricing power in Korea are semiconductors, automobiles, retail (distribution), and hotels/leisure," adding, "These sectors have shown expectations for external growth and improvements in gross profit margin (GPM) since the beginning of the year." He continued, "However, parts stocks within the automobile sector have recently shown a decline in GPM, and other distribution sectors besides department stores within retail/distribution have high GPM volatility, leaving uncertainties in margin maintenance." He advised focusing on blue-chip stocks with stable performance and cash flow in a reverse financial market where stock prices fall despite solid earnings due to government tightening policies. Among them, stocks with secured pricing power were seen as promising.

Hana Financial Investment presented automobiles, media/education, cosmetics/clothing/toys, chemicals, IT home appliances (secondary batteries), IT hardware, essential consumer goods, and semiconductors as sectors with high expected returns in the second half. Researcher Lee Jae-min of Hana Financial Investment emphasized, "From now on, the volume (Q) indicator, not price (P), is important, so attention should be paid to sectors where sales volume recovery or improvement is possible." Recommended individual stocks included Samsung Electronics, POSCO Holdings, Celltrion, LG Household & Health Care, NCSoft, Hankook Tire & Technology, Pan Ocean, DB HiTek, CJ ENM, S-1, Lotte Fine Chemical, SM, and Com2uS.

Samsung Securities viewed stocks that achieve inflation hedging, cash generation capability, and economic value added (EVA) as promising. This is because, during an economic slowdown, the sales occurrence and cash conversion cycle lengthen, which can lead to liquidity crises despite large accounting profits and asset holdings. Researcher Kim Yong-gu of Samsung Securities said, "Sectors capable of inflation hedging, cash generation, and securing economic value added include semiconductors, automobiles, banks, and steel," and recommended individual stocks such as Samsung Electronics, Samsung Biologics, SK Innovation, Hyundai Construction, KB Financial Group, Kakao, Kia, LIG Nex1, LG Energy Solution, and BGF Retail.

Shinhan Financial Investment advised focusing on sectors with good sales prospects and strengthened capital expenditure and margins. Researcher Kim Seong-hwan of Shinhan Financial Investment said, "Sectors with strong business conditions (sales momentum) and simultaneously strengthened capital expenditure and margins are likely to gain higher market preference," citing semiconductors and transportation as such sectors.

'Inflation Response' as a Defensive Sector

There is also much investment advice to focus on inflation-defensive stocks. Even if the upward trend slows, prices remain at relatively high levels compared to the past. Representative defensive sectors such as food and beverages and refining can pass increased costs to consumers through price hikes, making them inflation response stocks.

Korea Investment & Securities expects refining stocks to perform well due to structurally strong refining margins, and convenience store stocks are also recommended as they can pass price increases to consumers. Cape Investment & Securities recommended food and beverage stocks, as they can pass rising grain prices to consumers and improve profit margins when grain prices fall. Researcher Na Jeong-hwan of Cape Investment & Securities said, "The food and beverage sector has already raised consumer prices, but with the continued rise in grain prices, additional price hikes may be implemented if margin compression occurs," and evaluated, "The refining sector is steadily improving its operating profit forecast this year while oil prices remain high."

Reopening stocks are also a focus. Researcher Park Seung-jin of Hana Financial Investment pointed out, "Hotels, resorts, casinos, and retail are expected to rise due to reopening momentum." Air and maritime transportation are also promising sectors, as demand is expected to continue steadily.

Industries to be cautious about include displays and home appliances. For the display sector, a decline in overall goods demand due to reduced real income and consumption capacity caused by persistent high inflation is expected to negatively impact display demand. Particularly, the home appliance sector, which experienced a boom due to pent-up consumption, is expected to see demand slow down as it enters the COVID-19 endemic (periodic epidemic) environment, requiring investment caution.

Focus on Sectors with Foreign Investor Return

Investment strategies based on foreign ownership ratios were also raised. Daishin Securities focused on oversold stocks with increasing foreign ownership ratios. Recommended stocks included SK Innovation, LG, Ottogi, Samsung C&T, Hyundai Motor, Hyundai Rotem, Samsung SDI, SK Hynix, Kakao, and Samsung Electronics.

By the same logic, sectors where foreign investors are returning are also a focus. Researcher Na said, "If risks affecting manufacturing-centered emerging markets are resolved, it is necessary to increase weights in sectors where foreign investors are likely to flow in (semiconductors), sectors benefiting from the resolution of global supply chain disruptions and expansion of production and delivery (IT hardware, automobiles, transportation), and sectors benefiting from improved operating profit margins when raw material prices fall (food and beverages)."

Meanwhile, Hana Financial Investment forecasted the sector outlook for Q3, expecting better trends in telecommunications services, secondary batteries, steel and metals, automobiles, refining, shipbuilding and machinery, distribution and cosmetics, banks and cards, and textiles and apparel, compared to sectors such as electronics and mobile phones, displays, internet games, petrochemicals, utilities, pharmaceuticals and bio, food and tobacco, entertainment, leisure and media, and construction. For Q4, they projected excellent trends in secondary batteries, steel and metals, automobiles, refining, shipbuilding and machinery, distribution and cosmetics, food and tobacco, entertainment, leisure and media, banks and cards, textiles and apparel, and construction sectors.

Researcher Lee Kyung-soo of Hana Financial Investment said, "The slowdown in KOSPI profit momentum is a factor that enhances the performance of the earnings momentum factor, and stock price differentiation is expected to be severe depending on earnings direction, so performance stocks are expected to perform well in the second half," adding, "Trading companies, airlines, steel, automobiles, energy, and food and beverages are among the sectors with upward earnings revisions in Q2, while displays, home appliances, cosmetics, media entertainment, construction, and technology hardware are experiencing downward earnings revisions in Q2."