[Weekly Market Outlook] A Market Sensitive to Negative Factors... The Worst Situation Is Passing

The stock market this week (October 30 to November 3) is expected to see frozen investor sentiment persist, ahead of major indicators released at the end and beginning of the month, as well as the U.S. Federal Open Market Committee (FOMC) meeting in November.

Last week, the KOSPI fell by 3.04% and the KOSDAQ by 2.70%. The KOSPI barely held the 2300 level to close the week. On the 26th, the KOSPI dropped 2.7%, marking its largest decline this year, breaking below the 2300 level for the first time since January 6. However, it managed a slight rebound the next day, recovering the 2300 level.

[Image source=Yonhap News]

The index was dragged down by simultaneous negative factors such as rising interest rates and geopolitical risks. Yoojun Choi, a researcher at Shinhan Investment Corp., analyzed, "Adverse factors occurred simultaneously. Expectations for the U.S. third-quarter GDP rose, causing interest rates to rise again, increasing the burden. As feared, Israel launched a ground operation against Hamas, raising the possibility of a full-scale war, which further increased uncertainty." He added, "The third-quarter earnings season showed a different atmosphere from the first half, with earnings estimates being revised downward and some companies delivering earnings shocks, causing stock prices to react sensitively to negative news, with stocks experiencing earnings shocks seeing larger declines."

In particular, the significant correction in secondary battery stocks added pressure to the market. Seungyoung Park, a researcher at Hanwha Investment & Securities, said, "The October market corrected mainly around the overheated secondary battery sector. The combined market capitalization of 34 stocks included in the secondary battery exchange-traded fund (ETF) decreased from 359.3 trillion KRW at the end of September to 291.3 trillion KRW as of the closing price on the 25th, a decline of about 18.9% in roughly one month. The proportion of these stocks in the combined market capitalization of KOSPI and KOSDAQ fell from 15.57% to 13.63%, a drop of 1.94 percentage points." He forecasted that the impact of the decline on the secondary battery index would also diminish. Park said, "As the decline in secondary battery stocks lessens, their influence on the overall stock index will also decrease, and the KOSPI will find stability."

There are also opinions that the market is overly sensitive to negative factors and is failing to recognize positive aspects. Younghwan Kim, a researcher at NH Investment & Securities, explained, "High interest rates are not only burdening discount rates but also stimulating concerns about economic slowdown, which may cause the market to excessively ignore positive signals. In a phase where the market overreacts to negative factors, it is necessary to focus on the undervaluation merits of the market." NH Investment & Securities projected the KOSPI range for this week to be between 2250 and 2370.

As valuation attractiveness increases, the worst situation is believed to be passing. Kyungmin Lee, a researcher at Daishin Securities, said, "The KOSPI’s 12-month forward price-to-earnings ratio (PER) is 9.79 times, and the price-to-book ratio (PBR) is 0.8 times, indicating a level down. Currently, the KOSPI has entered a range with high price and valuation appeal. We believe the worst is behind us and the market is approaching a bottom."

Rather than reducing exposure, it is suggested to increase portfolio weights in sectors with favorable earnings and supply-demand conditions. Lee said, "If U.S. bond yields stabilize, it could be a catalyst for a market turnaround. Although the index decline has been deeper than expected, reducing exposure at the current level is not beneficial. Instead, it is advisable to use this opportunity to increase portfolio weights in sectors such as semiconductors, automobiles, shipbuilding, machinery, and IT hardware, which have favorable earnings, business conditions, and supply-demand."

Key events to watch this week include China's October Purchasing Managers' Index (PMI) released by the National Bureau of Statistics on the 31st, followed by South Korea's October trade data, U.S. October Automatic Data Processing (ADP) employment data, and U.S. October Institute for Supply Management (ISM) manufacturing data on November 1. The November FOMC meeting is scheduled for the 2nd. On the 3rd, the U.S. October employment report and U.S. October ISM non-manufacturing index will be released. Researcher Yoojun Choi said, "Market attention will shift to the FOMC. While the focus is on a rate hold, geopolitical risks, high market interest rates, and robust GDP opinions are important." He added, "The increase in U.S. Treasury issuance is also a cause of rising interest rates. The U.S. Treasury issuance plan will be announced on the 30th, which is an event that will affect the overall financial market."