[MarketING] Reasons Why Adjustment Is Needed

KOSPI Starts Lower Then Turns Higher
Correction Needed to Ease Valuation Pressure

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The market remains in a box range. Although the index is moving sideways, earnings forecasts are declining, increasing valuation pressure. There are opinions that a correction is necessary to alleviate the valuation burden.

KOSPI Starts Lower but Turns Upward

As of 10:25 a.m. on the 17th, the KOSPI was up 2.75 points (0.11%) from the previous session, standing at 2453.96. The KOSDAQ rose 9.4 points (1.21%) to 785.02. The KOSPI, which started lower, turned upward and is moving in a strong flat range.

Compared to January, the market environment is less favorable, making it difficult to break through the upper resistance. Han Ji-young, a researcher at Kiwoom Securities, said, "Unlike January, the macro environment is less favorable due to rising interest rates, a strong dollar, and fading expectations for a Fed rate cut within the year, which is limiting the market's upside. The fact that the KOSPI cannot surpass the mid-to-long-term trend line of 2500 points is in the same context."

It is expected that the box range trend will continue for some time as major economic indicators and events are absorbed. The researcher added, "This week, the Korean stock market will digest events such as the February U.S. Federal Open Market Committee (FOMC) minutes, major countries' manufacturing Purchasing Managers' Index (PMI), U.S. Personal Consumption Expenditures (PCE) inflation, Korean exports, and changes in the won-dollar exchange rate after the February 23 Financial Monetary Committee meeting, showing a box range trend. It is appropriate to prepare for the possibility that the current market sentiment will continue until employment and inflation data, which will be obtained once more before the March FOMC, are confirmed."

It is difficult to expect a strong short-term rise. Jeong In-ji, a researcher at Yuanta Securities, explained, "After about three weeks of period adjustment, a sell signal appeared on the Moving Average Convergence Divergence (MACD) indicator, and strong resistance at the 2500-point level was confirmed, making it difficult to expect a strong short-term rise. The market has inertia, so once momentum slows, it tends to continue for a certain period."

Although the market is undergoing a correction, valuation pressure remains. Choi Yoo-jun, a researcher at Shinhan Investment Corp., analyzed, "The KOSPI 12-month forward Price-to-Earnings Ratio (PER) is approaching 13 times, and despite the Q4 earnings season nearing its end, downward pressure on earnings estimates is acting. Historically, a high PER during periods of declining earnings estimates has limited the KOSPI's upper range." PER is calculated by dividing the current price by earnings per share, and the 12-month forward PER is calculated using the current price and future earnings forecasts (consensus).

Correction Needed to Ease Valuation Pressure

As of the 17th, the KOSPI 12-month forward PER recorded 12.77 times. Since the KOSPI reached the 2480 level on the 27th of last month, the 12-month forward PER has risen from 12.5 to 12.8 times during a narrow box range fluctuation between 2420 and 2480 points over three weeks.

Lee Kyung-min, a researcher at Daishin Securities, said, "This is due to the 12-month forward Earnings Per Share (EPS) being downgraded from 197.8 points to 192 points. Historically, the KOSPI has only exceeded a 12-month forward PER of 13 times twice: just before the financial crisis (July 2007) and after the COVID-19 shock (August 2020). The commonality in both cases is that the index did not continue an upward trend after quickly surpassing 13 times."

There is an opinion that a correction is necessary to ease valuation pressure. The researcher emphasized, "In the short term, the KOSPI may attempt to break through 13 times, but further valuation increases or index level-ups are difficult. Price or period adjustments are needed to relieve valuation pressure to expect the next rise."

Even if a correction occurs, it is expected not to be severe. Jeong said, "Since July last year, the period of forming high points during the long-term sideways movement has continuously lengthened, and the market is not easily allowing a decline this time either. Therefore, even if there is a correction, a strong price correction is unlikely. The mid-to-long-term direction is likely to be upward, so it is better to view corrections as preparation periods for a full-fledged rise rather than declines."

Choi added, "Even if correction factors appear, support is likely around the 2400-point level due to improved views on the economy and market participants' risk appetite."