Nakao Smiles at Powell's Words... "Favorable Mid-to-Long Term, Buying Opportunity at Low Prices"

3 Consecutive Trading Days of Gains
Fewer COVID-19 and Liquidity Variables Next Year
Brokerage Firms "Possibility of Earnings Improvement"
Also Pointing to Selective Investment in Growth Stocks

[Asia Economy Reporter Myung-hwan Lee] Naver and Kakao, the representative growth stocks of the domestic stock market, are smiling. This comes as Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), hinted at adjusting the pace of interest rate hikes. Securities firms advised that these stocks are expected to show improved earnings next year and should be used as an opportunity for bargain buying.

According to the Korea Exchange on the 2nd, Naver (NAVER) and Kakao both closed higher on the previous day, the 1st, marking three consecutive trading days of gains. Naver rose to 195,000 KRW early in the session but ended trading at 187,500 KRW, up 0.27% (500 KRW) from the previous day, as the gains sharply narrowed in the afternoon. Kakao also saw gains exceeding 5% at one point but closed at 57,900 KRW, up 2.66% (1,500 KRW) from the previous day. Kakao’s financial affiliates, KakaoBank (5.79%) and KakaoPay (3.59%), also closed higher.

The rebound in growth stocks followed Powell’s indication on the 30th of last month (local time) that the pace of rate hikes might be moderated. In a speech at the Brookings Institution that day, Powell said, "The time to slow the pace of rate hikes could come as soon as December," suggesting that the Federal Open Market Committee (FOMC) meeting next month might decide on a big step (0.50 percentage point increase) instead of a giant step (0.75 percentage point increase). As a result, the Nasdaq index, which is heavily composed of tech stocks, surged 4.41% in a single day.

Naver and Kakao, considered the leading growth stocks in the domestic market, began to decline sharply after peaking in June. This was due to the continuation of the global central banks’ interest rate hike trend starting with the Fed in the third quarter. The global rate hike trend increases the discount rate on future corporate earnings, which burdens growth stocks like these. Naver’s stock price, which peaked at 290,000 KRW in June, dropped by more than 100,000 KRW, and Kakao, which was in the 85,000 KRW range, fell to the 50,000 KRW range.

Negative factors specific to each stock also added pressure. Kakao faced a massive setback in October due to a fire at its Pangyo data center, which caused a complete shutdown of major services including KakaoTalk and Daum. Naver announced the acquisition of Poshmark, North America’s largest fashion C2C (consumer-to-consumer) community, but the market perceived this as an overambitious decision, leading to a weak stock performance.

Securities firms raised their voices that the negative factors have already been reflected in the prices of these two stocks, so they should be used as opportunities for bargain buying. Dong-hwan Oh, a researcher at Samsung Securities, said, "In 2023, the effects of external variables such as COVID-19 and market liquidity contraction are likely to gradually diminish, so corporate earnings improvement and stock price rebounds are expected," adding, "We recommend bargain buying of platform companies at a time when economic recovery is anticipated."

However, there were also remarks that selective investment is necessary in the internet and gaming sectors, which include many growth stocks. Jin-gu Kim, a researcher at Kiwoom Securities, emphasized, "The internet and gaming sectors are sensitive to macro variables such as interest rates and tend to have higher beta (volatility relative to the market) compared to other sectors, so their return volatility can be large."