[Research Center Director Urgent Diagnosis] Do Not Predict KOSPI Bottom... Endure the Time Battle and Accumulate Price

[Image source=Yonhap News]

[Asia Economy Reporters Lee Seon-ae and Lee Myung-hwan] At the start of July, the market plunged sharply. On the first trading day, the KOSPI slipped below 2300 during the session, setting a new year-to-date low. The last time the KOSPI was in the 2200 range during trading hours was about 1 year and 8 months ago, on November 2, 2020. Now, heads of securities firms' research centers unanimously agree that predicting the KOSPI’s bottom is futile. They only roughly suggest an expected bottom band around the 2200 level. They emphasize that panic selling is pointless. The message is not to respond with 'panic selling'?selling at a loss out of fear?but to hold on. Since the KOSPI is collapsing as a self-fulfilling prophecy of an economic recession, investors are urged to engage in a battle against time. This ultimately means that the market needs time to recover from the bear market. However, if one holds cash, it is advised that the period when the 'buy-the-dip' theory powered by fear is effective is indeed now.

Where is the KOSPI Bottom? '2200'

Nobody knows. Research center heads stress that accurately predicting the index bottom is meaningless. Yoon Ji-ho, head of the Ebest Investment & Securities Research Center, said, "Nobody knows where the bottom is," adding, "Tightening, inflation, and recession are pulling it down, and consumption is also weak."

Shinyoung Securities has consistently emphasized that predicting the KOSPI bottom is meaningless. Kim Hak-gyun, head of the research center, diagnosed, "Predicting the bottom is a futile task," and Seo Sang-young, head of the Media Content Division at Mirae Asset Securities, also stated, "There is no prediction about where the bottom is."

However, based on past records, the KOSPI bottom is at 2200. Oh Tae-dong, head of NH Investment & Securities Research Center, said, "The stock market bottoms reflecting concerns about economic slowdown are clustered around a price-earnings ratio (PER) in the low 8s," adding, "Considering the current KOSPI earnings level, it is appropriate to set the lower bound of the index at 2200, which corresponds to a PER of 8.1." He continued, "Given the latent concerns about economic slowdown, it is unlikely that the KOSPI PER will exceed the long-term average level," and "Therefore, applying the long-term average PER of 10 times, the upper bound is set at 2700."

Lee Kyung-soo, head of Meritz Securities Research Center, also assessed, "Assuming the KOSPI return on equity (ROE) is at a historical low level, the fair value at 7% is around 2200." Yoon Seok-mo, head of Samsung Securities Research Center, also pegged the KOSPI bottom at 2200 and expected volatility only within a box range up to 2600.

KB Securities set the bottom at 2100. Yoo Seung-chang, head of KB Securities Research Center, pointed out, "Corporate earnings estimates have started to decline, and the bottom phase will be when the price-earnings ratio (PER) decline stops after earnings per share (EPS) is rapidly revised downward."

Why the conservative view? The current domestic stock market is diagnosed as being engulfed by excessive fear of economic recession. Center head Yoon Seok-mo said, "The market has accepted a self-fulfilling economic recession as a given." He pointed out that the market is consistently reacting with extreme hypersensitivity, assuming a 1970s-1980s style high inflation environment, Fed monetary tightening under Paul Volcker (then Fed chairman), rapid economic recession, and worst earnings uncertainty as facts. He said, "This is why sentiment (price, psychology) overwhelms fundamentals (value, earnings), leading to record price adjustments and rock-bottom valuations comparable to those during global recessions."

Along with the self-fulfilling recession prophecy, pessimism about Korean exports and corporate earnings is also spreading. This extreme skepticism toward earnings consensus is spreading and fueling concerns about further domestic stock market declines.

'Buy in Fear'?Respond After Confirming Corporate Earnings

With market volatility increasing, it is difficult to establish investment strategies. Since corporate earnings estimates may change significantly, many advise maintaining a wait-and-see stance and responding after confirming the direction.

According to financial information provider FnGuide, the consolidated net profit forecast for this year of 239 listed companies with earnings estimates from three or more consensus institutions is 182.1428 trillion KRW, a 0.2% decrease from last year. The second-quarter net profit of 177 listed companies with estimates is expected to be 35.9321 trillion KRW, down 0.4% from the same period last year. Their second-quarter operating profit estimate is 48.8565 trillion KRW, up 2.5%. However, 59 companies reported a decrease in operating profit compared to the second quarter of last year, accounting for 33.3% of all companies with earnings estimates. In other words, about 3 out of 10 listed companies are expected to see a decline in operating profit in Q2 compared to the same period last year.

According to NH Investment & Securities, over the past two weeks, the operating profit forecasts for KOSPI-listed companies for Q2 and Q3 were revised downward by 1.0% and 2.8%, respectively. The downward revision for Q4 operating profit was even larger at 3.6%.

Center head Lee Kyung-soo said, "Due to concerns about economic slowdown and raw material prices, there is a possibility of changes in annual corporate earnings estimates after Q2 results," adding, "The short-term direction can be gauged after the Q2 earnings season, but the medium- to long-term direction requires resolution of uncertainties regarding economic and policy paths." He urged waiting until the direction of economic and policy paths becomes clear. Head Seo Sang-young said, "Whether the US recession issue is highlighted immediately is key," and added, "We need to watch the July Federal Open Market Committee (FOMC) meeting."

The 'buy-the-dip' theory is also emerging. It is judged to be a time when price must be secured in exchange for time. Center head Yoon Seok-mo said, "Volatility in the stock market in Q3 is inevitable, so active risk management cannot be excluded," but added, "Since the market has already priced in much of the worst, unless a catastrophe immediately materializes, the market is likely to be insensitive to known bad news and extremely sensitive to unpriced good news." He continued, "In the current price, valuation, and supply-demand environment, herd-like panic selling is of no benefit," emphasizing, "The Q3 ordeal should be used as an opportunity for bargain buying aimed at Q4 and beyond, focusing on securing price in exchange for time."

Center head Yoon Ji-ho also said, "In conclusion, the price-to-book ratio (PBR) has fallen to 0.9 times; now is not the time to sell, and if you hold cash, you should buy," adding, "You cannot invest by looking at the bottom by time units, but it is a time when you can take risks and buy."

Center head Yoo Seung-chang said, "Corporate earnings slowdown and recession concerns will affect the market in the second half," adding, "However, a bear market rally due to excessive decline may appear, so we need to watch whether the government takes measures to stabilize raw material prices." He added, "It is necessary to focus on sectors with low inventory or those that can benefit from falling raw material prices."