[Urgent Diagnosis] KOSPI Attempts Reversal in March... Must Respond with Bottom-Fishing Strategy at 2400 Level

KOSPI Declines Since Early Year Amid Fading Interest Rate Cut Hopes and Rising Geopolitical Risks
Stock-Specific Market Expected for the Time Being

Until the end of last year, expectations for a U.S. interest rate cut spread throughout the market, leading the KOSPI to rise continuously, but the mood changed after the beginning of the year. Experts diagnosed that the recent rapid tightening of our market was due to a combination of domestic and international adverse factors erupting simultaneously, such as the retreat of interest rate cut expectations. They also predicted that as the direction of interest rate cuts becomes clearer and geopolitical risks subside, the KOSPI will attempt a trend reversal in March.

Interest Rate Issues... Overlapping Domestic and International Adverse Factors Including Concerns over China's Economic Recession, Earnings Shock, and Geopolitical Risks

On the 22nd, research center heads from five major domestic securities firms (Samsung, NH Investment & Securities, Daishin, IBK Investment & Securities, Korea Investment & Securities) commonly cited 'interest rate issues' as the reason for the domestic stock market's weakness.

Lee Seung-hoon, head of the IBK Investment & Securities Research Center, said, "It is a process of resolving the excessive reflection of short selling bans and expectations for U.S. interest rate cuts in November and December last year." As Lee explained, the market weakness at the beginning of the year is largely due to the retreat of expectations for early global interest rate cuts that had lifted stock prices and stabilized exchange rates amid the disinflation trend at the end of last year. With a series of strong U.S. economic indicators released early this year, there are also forecasts that the timing of the Federal Reserve's (Fed) interest rate cut, expected in March this year, will be delayed to the second half.

Kim Young-il, head of Daishin Securities Research Center, pointed out, "The strong U.S. economic indicators have dampened expectations for rate cuts," adding, "The U.S. economy is still holding up well, but the rebound in bond yields and the weakness of emerging market stocks vulnerable to a strong dollar are increasing supply-demand burdens on the KOSPI."

Oh Tae-dong, head of NH Investment & Securities Research Center, said, "As expectations for interest rate cuts by major central banks have retreated, investor sentiment has weakened," adding, "As of the 17th, the won-dollar exchange rate surpassed 1,340 won, and foreign investors recorded a net selling of about 900 billion won in the KOSPI market."

Yoon Seok-mo, head of Samsung Securities Research Center, analyzed, "The market consensus expected the first rate cut in March and 6 to 7 cuts within the year, but recently, the index has fallen as expectations for early, aggressive Fed rate cuts have retreated."

The earnings shock from large-cap companies such as Samsung Electronics, which announced results early this year, also acted as a negative factor for the index. The fact that earnings forecasts are being revised downward across large KOSPI stocks since the beginning of the year is another variable. According to FnGuide, among the top 20 KOSPI market capitalization stocks, 14 have had their annual operating profit estimates revised downward in the past month.

Kim said, "Samsung Electronics, LG Electronics, and LG Energy Solution, which announced earnings in early January, are industry leaders," adding, "The earnings shock of large-cap companies has materialized, and as operating profit forecasts for this year have been revised downward, uncertainty about earnings has increased."

If interest rates and earnings were potential concerns the market had in mind, recent concerns about China's economic recession, North Korea-related security threats, and the rekindling of U.S.-China conflicts are unexpected variables. Since these were unforeseen factors, their impact on the market was significant. When news broke that China's GDP growth rate last year was the lowest in 33 years excluding the COVID-19 pandemic, Asian stock markets turned sharply negative on the 17th. On that day, foreign investors sold a net 902 billion won in the KOSPI alone. The foreign investors' selling of won also pushed the won-dollar exchange rate to its lowest level since November last year.

Oh said, "Concerns over China's real estate sector expanded, and former President Donald Trump overwhelmingly won the first Republican presidential primary caucus in Iowa, leading investors to respond with selling in Chinese and Korean stock markets amid fears of worsening U.S.-China relations."

Kim added, "As China's inflation fluctuates around negative territory, weak real economy indicators and momentum slowdown have led to deflation concerns, increasing downward pressure on emerging and emerging Asian stock markets," adding, "Supply-demand burdens related to Hong Kong equity-linked securities (ELS) also coincided."

Yoo Jong-woo, head of Korea Investment & Securities Research Center, said, "Rising domestic and international interest rates, along with geopolitical risks in the Middle East and North Korea, have highlighted risk aversion, strengthening selling pressure."

Interest Rate Uncertainty Must Disappear... KOSPI to Attempt Reversal in March

Research center heads predicted that the KOSPI can attempt a trend reversal only when uncertainty about the direction of interest rates clears.

Yoon said, "Expectations for the timing and number of rate cuts will largely retreat after the Federal Open Market Committee (FOMC) meeting on the 31st," adding, "Expectations related to China's Two Sessions (National People's Congress and Chinese People's Political Consultative Conference) will be priced in early, and a bottom confirmation is expected in February." He also viewed the 2,410 level of the KOSPI index as a point where valuation merits could function as downside support.

Oh advised, "Investor expectations for excessive rate cuts and earnings uncertainty, which act as downward factors for stock prices, must be resolved," adding, "The gap between investors and the Fed regarding the scale of U.S. rate cuts within the year needs to narrow, or additional earnings improvements from U.S. big tech companies need to be confirmed."

There are also views that the KOSPI will bottom out and rebound starting in March. This is because the FOMC in January is likely to discuss slowing the pace of quantitative tightening (QT), and the Q4 earnings season is expected to peak after mid-February. Kim said, "We expect an attempt at a mood reversal through February and March," adding, "By the end of February, the U.S. core personal consumption expenditures (Core PCE) index is expected to approach the 2% range, potentially reviving expectations for U.S. rate cuts, and China's economy may turn around as stimulus expectations build after the Two Sessions in March."

Yoo judged, "Although earnings volatility in Q4 last year may be large, earnings forecasts for this year are favorable, so the index rebound can occur only if the interest rate rise stops."

Hold and Buy Rather Than Watch and Sell... Buy at Low Prices Around Mid-to-Late 2400 Level

With multiple variables weighing on the stock market simultaneously, the calculation for investment strategy has become complicated. Research center heads say that as the KOSPI has fallen, enabling low-price buying, investors should respond by holding and buying rather than watching and selling.

Yoon suggested, "Until the market overcomes the three hurdles brought by the early-year headwinds (retreat of rate cut expectations, deterioration of global earnings momentum, and decline in foreign investor sentiment), a time battle is inevitable," adding, "However, in terms of price and valuation, the KOSPI at around the 2,400 level has become a scenario where watching and selling lose, and holding and buying win."

There is also an opinion that if the price merit and index band support the mid-2,400 range, low-price buying should be pursued. Lee said, "A low-price buying strategy is valid when the KOSPI highlights price merit around the mid-2,400 level," adding, "Efforts to surpass previous highs by March will continue, driven by semiconductor-centered economic and earnings improvements." However, he noted that if Samsung Electronics approaches or surpasses 80,000 won, the market merit may weaken.

Kim said, "Due to a steeper-than-expected decline, the index may level down to a point where selling is not beneficial, so investors with a high stock ratio need patience," adding, "At the current KOSPI index level, a strategy to expand the weighting of leading stocks such as semiconductors, shipbuilding, and internet stocks by utilizing volatility is effective."

There is also a forecast that a stock-specific market will continue for a while as demand concentrates on stocks expected to increase earnings. Oh said, "As the domestic index adjusts in January and the excessive rate cut expectations normalize by early February, a stock-specific market is expected to continue," adding, "A full-scale KOSPI rise is likely only after the 2023 annual earnings announcements and the adjustment of earnings outlooks for this year."

Yoo suggested, "Since the sharp decline is due to external variables such as geopolitical risks, it is necessary to focus on companies with solid earnings, which are the essence of stock prices," and proposed, "Strong IT stocks will be an alternative."