[Practical Finance] KOSPI Surpasses 2700 After 2 Years, What to Buy Now?

KOSPI, Can It Rise Further?
Focus on Consensus Change Rate and Earnings Growth Rate
Value-Up Continues... Foreign Investor Supply Is Key
Analyze Specific Election Promises Rather Than the Election Itself

The KOSPI surpassed the 2700 mark for the first time in about two years. After a rally in low price-to-book ratio (PBR) stocks, it successfully rose by digesting events such as Nvidia GTC2024, the U.S. Federal Open Market Committee (FOMC), and Micron's earnings announcement. Now, with the first-quarter earnings announcements, the general election, and the concretization of corporate value-up programs ahead, investors' interest in KOSPI's trajectory is growing.

According to the Korea Exchange on the 27th, the KOSPI closed at 2718.76 on the 14th, recovering the 2700 level for the first time in about two years since it recorded 2702.10 in May 2022. The domestic stock market has steadily raised its lows after attempting a trend reversal in October last year, driven by expectations of a pivot by the U.S. Federal Reserve (Fed). Especially this year, foreigners have led the rise by net buying about 14 trillion won in the KOSPI, surpassing last year's annual net purchase of about 11 trillion won.

The market is currently approaching the first-quarter earnings announcement season. Following the April 10 general election, the government’s corporate value-up program guidelines will be finalized in May. Experts advise paying attention to companies with earnings momentum, the impact of election pledges, and additional government measures to resolve domestic market undervaluation.

Focus on Companies with Upward Earnings Revisions

First, there is an analysis that attention should be paid to the first-quarter earnings announcements of domestic listed companies, which will begin in earnest next month. Seungyoung Park, a researcher at Hanwha Investment & Securities, explained, "Companies announcing earnings in April account for only 16% of the KOSPI but represent 63% of the profit share. Because companies with high market importance announce earnings first, it helps gauge the overall business conditions for the year."

Researcher Park analyzed, "The earnings surprise rate for companies announcing first-quarter earnings in April is 49%. Narrowing the selection to companies whose earnings consensus (average securities firm forecast) has been revised upward from late February to late March raises the surprise rate to 73%. In other words, stocks with earnings expectations are more likely to deliver surprises." He added, "SK Hynix, LG Innotek, and LG Energy Solution saw their first-quarter operating profit estimates rise by more than 10% in March alone, while Hanwha Systems, Samsung Electronics, and Samsung Electro-Mechanics had estimates increase by more than 3%. Although some of these stocks have risen significantly recently, they are more likely to produce earnings surprises than others, so continued attention is necessary."

Myeonggan Yoo, a researcher at Mirae Asset Securities, named semiconductors as the top preferred sector. He said, "Market attention is expected to shift to the first-quarter earnings season. While profit growth rates in sectors other than semiconductors are not high, semiconductors show high consensus change rates and earnings growth rates." He added, "However, the high concentration indicator in semiconductors is a concern. Besides semiconductors, sectors like cosmetics and electric power equipment also show favorable earnings momentum."

The Driving Force Behind Additional Foreign Inflows is the 'Value-Up Program'

The Bank of Japan (BOJ) raised its benchmark interest rate from -0.1% to 0.0~0.1% at the monetary policy meeting held on the 19th, ending negative interest rates for the first time in 17 years. Dongchan Yeom, a researcher at Korea Investment & Securities, explained, "If the yen strengthens, some funds that flowed into Japan may flow out. Therefore, it is necessary to check the direction of Asian capital flows from a global fund flow perspective, including additional foreign capital inflows."

Yeom predicted that the competitiveness of the domestic stock market due to the value-up program will affect foreign demand that can flow in additionally in the future. He emphasized, "Foreign funds that had been net buying Korean stocks since November last year weakened in March. If funds flow out of the Japanese stock market, Korea needs to be attractive enough for foreigners to consider buying. Valuation and growth are positive, but low profitability and shareholder return policies remain issues."

He continued, "The government's first value-up program announced at the end of February was disappointing, but the government is continuing to announce additional policies. Recently, the government has announced corporate tax relief measures for companies that expanded treasury stock cancellations and dividends, and the Financial Services Commission announced plans to reduce dividend income tax for companies increasing dividends." He added, "The record foreign net buying in February reflected expectations for the value-up program. If the government continues additional measures, foreign net buying inflows may resume."

14 Days to the General Election... Impact on the Stock Market

Some in the financial investment industry express concerns that the market's upward momentum, including value-up, is being exhausted as the March shareholder meeting season passes and the April 10 general election approaches. Researcher Park said, "Of course, politics affects the economy, but statistically, election results have never changed the direction of the stock market. Especially since the real estate market is in a slump, there is a consensus that household money should be allowed to flow into domestic stocks."

Meanwhile, since the general election itself does not determine the medium- to long-term direction of the index, there is analysis that attention should be paid more to election pledges than the election itself. Daewook Kim, a researcher at Hana Securities, analyzed, "Major policies confirmed in both ruling and opposition parties are low birthrate and climate crisis measures. Previously, cash policies such as birth vouchers were dominant, but now discussions on flexible work and work-life balance, including telecommuting after COVID-19, are becoming active again." Regarding climate crisis measures, Kim said, "A common point in the eco-friendly policies of both parties is wind power. The offshore wind capacity awarded at the end of last year has greatly expanded compared to 2022." He added, "Expectations for the passage of the Offshore Wind Power Special Act, currently pending in the National Assembly, could also be a factor highlighted in the next National Assembly."