[Good Morning Stock Market] "Jackson Hole Meeting Caution Continues... Will KOSPI Attract Rebound Buying?"

Concerns Over Economic Recession Stir
Nasdaq Steady Amid Perception of Excessive Decline

KOSPI, Nasdaq Sharp Drop Eases
Rebound Buying Expected to Flow In

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] The U.S. stock market showed a flat trend as major economic indicators underperformed, fueling concerns about a recession. With the Jackson Hole Conference approaching, a cautious stance has deepened, so while the KOSPI on the 24th will not be free from the influence of external factors, a rebound buying interest is also expected due to the previously large decline.

Han Ji-young, Kiwoom Securities Researcher: “High possibility of rebound buying amid perception of excessive decline”

The U.S. stock market showed some intraday gains as the slowdown in the U.S. manufacturing and services Purchasing Managers' Index (PMI) was confirmed. However, concerns about recession grew due to Jackson Hole caution and inflation worries stemming from the European energy crisis, leading to a decline at the close. The Dow Jones Industrial Average fell 0.47%, the S&P 500 dropped 0.22%, and the Nasdaq Composite remained unchanged from the previous trading day.

The U.S. August S&P Global Manufacturing PMI was 51.3, and the Services PMI was 44.1, both below expectations. The slowdown in economic indicators is a factor that raises expectations for a slower pace of interest rate hikes. However, the market focused on the Jackson Hole meeting, which serves as a preview for the September FOMC (Federal Open Market Committee).

Meanwhile, the domestic stock market is expected to rebound, supported by the perception of an excessive decline and the easing of the Nasdaq’s consecutive sharp drops, despite continuing to be affected by macroeconomic uncertainties as on the previous day. The verbal intervention by foreign exchange authorities and the decline in the dollar index, which brought the won-dollar exchange rate down from the 1340 won level to the 1330 won level, are also expected to contribute to improving investor sentiment.

Yoo Myung-gan, Mirae Asset Securities Researcher: “Second half earnings slowdown inevitable”

Market attention is shifting to the second half of the year and next year. Despite the second-quarter earnings announcements being more positive than expected, expectations for second-half earnings remain low.

Domestic companies’ combined operating profit growth rates for the third and fourth quarters are expected to decrease by 8.8% and increase by 6.4%, respectively, compared to the same periods last year. Third-quarter operating profit is expected to decline by 5% compared to the second quarter. The earnings consensus is also showing a weak trend. The consensus for combined third-quarter operating profit has been revised downward by 4.9% over the past month. The main reason was the large downward revision in the semiconductor sector’s earnings. Semiconductor sector earnings were lowered by 10.6%, and excluding semiconductors, earnings were reduced by about 2.4%. Additionally, operating profits for the third quarter in sectors such as utilities, shipbuilding, display, hotels and leisure, chemicals, and securities were also revised downward.

Expectations for corporate earnings improvement have already diminished, but the market anticipates further downward revisions. The reasons include increased cost of goods sold due to rising raw material prices and profitability deterioration due to inventory increases. The cost of goods sold ratio for companies rose from 78.9% in the third quarter of last year to 79.3% in the first quarter and 79.6% in the second quarter. Inventory assets also increased by 13.6% compared to the first quarter. Operating profit margin is expected to improve from 7.9% to 8.4%, but there is a high possibility of future downward revisions. Furthermore, even if a significant portion of the downward revisions is already reflected in stock prices, it will take time before corporate fundamentals improve.

Lee Kyung-soo, Hana Securities Researcher: “Strengthening the link between stock prices and earnings”

As investment plans are adjusted due to economic contraction and high interest rates, profits in the semiconductor and hardware sectors are declining, causing Korean corporate earnings to undergo a larger adjustment compared to the global market. Earnings revisions are further downward as profits in the energy and financial sectors, which had led earnings, are lowered due to adjustments in oil prices and interest rates. Additionally, the recent rise in the dollar index and emerging market bond spreads is making both earnings and investment sentiment challenging.

The slowdown in corporate growth rates causes earnings scarcity, meaning earnings stocks become more valuable. When earnings scarcity becomes prominent, there is a tendency to pre-reflect future profits, implying that next year’s earnings outlook could also be reflected in stock prices. Investor sentiment is also increasing interest in stocks with upward earnings revisions.

The only sectors showing upward earnings revisions are shipbuilding and defense. Recently, sectors such as aviation, textiles and apparel, trading companies, and energy have also seen earnings upgrades. It is important to approach the degree of earnings upgrades by individual stocks, with GKL, Sungkwang Bend, Paradise, Asiana Airlines, Hyundai Energy Solutions, and Hyundai Heavy Industries being notable examples.