"Pessimism Prevails: October's KOSPI Is Ruthless... 'Prepare for 2000'"

KOSPI Bottoming Out Near 2000 in October "Tightening and Profit Decline Strengthen Downward Pressure"
Conservative... Focus on Overly Declined Stocks with Steadily Rising Profit Estimates and Foreign Buying Interest

[Asia Economy Reporter Lee Seon-ae] It is the beginning of a brutal October. The securities industry unanimously agrees that the KOSPI’s bottom should be set as low as the 2000 level. Pessimism is deepening as the market is crushed by intensified global tightening and recession concerns, leading to strong downward pressure.

KOSPI to Fall Further... Brace for 2000

On the 4th, the securities firms generally set the lower bound of the KOSPI in October at around the 2000 level. This is due to the ongoing negative macro environment, including intensified global tightening by the U.S. Federal Reserve (Fed), expanding concerns over corporate profit declines, and the won-dollar exchange rate exceeding 1400 won.

By securities firm, the forecasts were ▲KB Securities 2020~2320 ▲Kyobo Securities 2200~2450 ▲Daol Investment & Securities 2180~2500 ▲Shinhan Investment Corp. 2050~2300 ▲Korea Investment & Securities 2100~2350 ▲Samsung Securities 2000~2400 (Q4) ▲Kiwoom Securities 2100~2350. Except for Daishin Securities, which predicted 2050 by year-end, and Samsung Securities, which forecasted 2000 around Q4, the lowest October bottom was set by KB Securities at 2020.

All securities firms anticipated that the 'triple burden' of high interest rates, high inflation, and high exchange rates, along with deteriorating corporate earnings and intensified high-level tightening, would weigh heavily on the stock market. KB Securities researcher Lee Eun-taek explained, "The market will stabilize only when the government bond yields fully calm down," adding, "The Fed needs to step back from tightening."

Shinhan Investment Corp. research fellow Noh Dong-gil emphasized, "The volatility in the Korean stock market is caused more by instability in the foreign exchange market than by fundamentals," and added, "Due to the sharp rise in the won-dollar exchange rate, foreign investors’ selling of spot and futures is negatively impacting the index, so it is too early to discuss the KOSPI’s bottom." He further noted, "In a phase where the won-dollar exchange rate needs to be left open to the upside, index volatility is likely to continue, so a conservative approach is necessary."

Korea Investment & Securities also predicted a further new low for the KOSPI. Senior researcher Kim Dae-jun said, "Negative macro factors such as high interest rates and high exchange rates, along with downward revisions of earnings forecasts, have been reflected in the stock price, causing the index to hit new lows," and added, "Although a market rebound and price recovery are fully possible later, now is the time to wait."

Samsung Securities researcher Kim Yong-gu, who forecasted the KOSPI’s lower bound at 2000 in Q4, said, "An irrational fear-driven chaotic market where price and value are overwhelmed continues," and predicted, "Price, interest rate, and exchange rate stabilization and strengthened policy coordination among major countries are key to market stability, but this will be difficult in Q4."

Conservative Approach... Focus on Defensive and Earnings-Improving Stocks

The securities industry advised that since further declines in the KOSPI are inevitable, investors should take a conservative approach but pay attention to sectors expected to show earnings improvement as valuations have become more attractive. Generally, the recommended sectors were automobiles, food and beverages, and secondary batteries. Among these sectors, companies with steadily increasing profits are judged to have resilient recovery power when the index rebounds.

Korea Investment & Securities senior researcher Kim Dae-jun said, "Given the difficult market, a conservative approach is essential," and added, "However, it is time to focus on companies with steadily rising earnings estimates and those showing foreign buying momentum." He continued, "Stocks meeting these conditions may have limited further downside and potential to rise faster than the market during a rebound." He cited automobiles and food and beverages as sectors of interest.

Shinhan Investment Corp. suggested sectors with resilience and expected earnings improvement such as automobiles, IT hardware, and IT appliances (secondary batteries). They also advised a traditional defensive stock strategy including food and beverages and telecommunications. Research fellow Noh said, "In the Q3 earnings season, a strategy focusing on sectors expected to exceed estimates and defensive stocks is necessary," and pointed out, "IT and transportation equipment can expect the highest margin improvement effects when the exchange rate rises, while telecommunications, healthcare, essential consumer goods, and retail sectors have the advantages of low earnings volatility and high earnings growth."

Daol Investment & Securities researcher Cho Byung-heon said, "Given concerns such as exchange rate volatility, inventory burdens, and macro cycle slowdown, a cautious approach to cyclical large-cap stocks is needed," and added, "Along with interest in traditional defensive stocks, it is worth exploring responses using sectors with expectations for structural growth paths such as eco-friendly, secondary batteries, automobiles, and defense."

Samsung Securities advised focusing on ▲stocks hedging against excessive decline and stagflation risk, cyclical export stocks (electric vehicles, refining, construction), and defensive domestic stocks such as defense, media, food and beverages, and distribution ▲stocks expected to deliver Q3 and annual earnings surprises despite excessive declines ▲high-quality stocks and high-dividend stocks with excessive declines.