[Asia Economy Reporter Lee Seon-ae] As the biggest variable for the domestic stock market next year is expected to be an economic recession, and the profit estimates of domestic companies continue to decline, it seems necessary to establish a cautious investment strategy. Since the recession is already reflected in the market, securities firms advise that sectors with the largest downward revisions in net profit estimates for next year may actually carry less risk. Additionally, sectors to watch in the short term amid the corporate profit decline cycle include growth stocks whose prices have fallen excessively and consumer goods related to the China reopening (resumption of economic activities).
According to the financial investment industry on the 6th, the KOSPI net profit estimate for 2023 has been revised downward by as much as 23% compared to the end of June (2022 net profit estimated at 156 trillion won, 2023 at 155 trillion won). Except for the global financial crisis in 2008, when the 2009 net profit estimate was revised downward by 31% from the end of June to the end of December, this is the largest downward revision.
Researcher Lee Jae-man of Hana Securities pointed out, "Currently, the decline in U.S. inflation could lead to a decrease in domestic export prices and future gross profit margins, which are corporate price indicators," adding, "Corporate sales consist of sales volume (Q) and sales price (P), and while the 2022 KOSPI gross profit margin estimate is 22%, it is expected to fall to the 17% range in 2023."
There is also a possibility that the profit estimates for domestic companies will be revised downward further. Researcher Lee Kyung-min of Daishin Securities said, "In November, Korean exports decreased by 14% year-on-year, and domestic and foreign economic indicators are showing negative growth," diagnosing, "It is time to prepare for further deterioration and the possibility of an accelerated decline in the manufacturing sector rather than expecting a reversal for the time being."
However, securities firms have advised that sectors with the largest downward revisions in net profit estimates for 2023 may actually have less risk of further downward revisions in profit estimates. For example, the steel sector's net profit estimate for 2023 has been revised downward by 21% as of December compared to the end of June. This is close to the -27% downward revision seen in the previous year’s net profit estimate. Sectors with similar levels of downward revisions in 2023 net profit estimates, comparable to the largest downward revisions in the previous year, include construction (-19%), media (-23%), software (-27%), semiconductors (-56%), and display (turning to a deficit).
Researcher Lee Jae-man emphasized, "In sectors where the next year's net profit estimate was most significantly revised downward in the current year, the actual average annual stock price returns and the probability of price increases were the highest," adding, "Considering that relatively high stock price returns were recorded until the second quarter of the following year, it is necessary to pay attention to software and semiconductors, where the 2023 net profit estimates have been absolutely the most significantly revised downward."
Growth stocks that have fallen excessively and consumer goods benefiting from the China reopening are also targets of attention. Researcher Seo Jeong-hoon of Samsung Securities advised, "Since concerns about an economic recession persist for the time being, it is recommended to focus on sectors with downward earnings forecasts." Stocks benefiting from the reopening include cosmetics-related stocks such as Amorepacific and LG Household & Health Care, as well as airline and duty-free shop stocks. There is also analysis that chemical and steel stocks, which experienced severe corrections this year, have potential for price increases next year due to expectations of earnings improvement. This is because China is emerging as a demand source for chemical and steel companies, raising expectations for increased consumption.
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