[Second Half Market Outlook] Leading Stocks Are "AI and Semiconductors"... Increasing Weight Remains Valid

Semiconductors, AI, Automobiles, and Healthcare to Drive Growth in Second Half
Export Boom Centered on Semiconductors Raises Corporate Profit Forecasts
Increased Share Until Q3

Heads of research centers at major domestic securities firms identified semiconductors as the leading sector for the Korean stock market in the second half of this year. They also forecasted that if the high exchange rate and strong export trends continue, the performance of domestic companies could level up in the latter half of the year. Furthermore, they advised that while a strategy of increasing portfolio weightings with the stock market's upward trend in mind is effective until the third quarter, from the fourth quarter onward, investment strategies should focus on economic slowdown and declining interest rates.

Second Half Stock Market Outlook: Semiconductors, AI, Cosmetics, Healthcare Promising... Corporate Earnings Outlook 'Clear'

The majority of survey participants pointed to semiconductors and artificial intelligence (AI) as the leading industries for the stock market in the second half, citing expected earnings improvements driven by increased demand. Lee Jong-hyung, Head of Kiwoom Securities Research Center, said, "The narrative of sustained high growth in the AI industry and the high earnings visibility of semiconductor stocks will make them the leading sectors in the second half."

Besides semiconductors, sectors such as cosmetics, automobiles, food and beverages, and healthcare, which are benefiting from continued strong export trends, were also identified as promising industries. KB Securities predicted that economically sensitive and consumer-sensitive stocks will lead the market initially, gradually transitioning into a rotation market involving consumer and economically sensitive stocks along with thematic stocks. IBK Investment & Securities expects defensive stocks to perform well in the third quarter, with secondary batteries gaining strength in the fourth quarter.

The earnings outlook for domestic companies in the second half was generally positive. Noh Geun-chang, Head of Hyundai Motor Securities Research Center, stated, "If U.S. demand is maintained, there is a possibility of earnings surprises."

There were also opinions that semiconductor price increases in the second half could lead to upward revisions in KOSPI earnings forecasts. Oh Tae-dong, Head of NH Investment & Securities Research Center, said, "Driven by recent price effects (semiconductor price increases), KOSPI earnings forecasts have risen, and skepticism about a 50% net profit growth rate in 2024 is gradually turning into confidence. We expect second-half sales growth to impact earnings improvement, with export stocks contributing to sales growth."

Kim Young-il, Head of Daishin Securities Research Center, analyzed, "Operating profit for KOSPI in the second half is expected to increase by 19% compared to the first half. Chemicals, IT hardware, healthcare, shipbuilding, media and education, IT home appliances, and semiconductors will lead the earnings level-up in the second half."

Ko Tae-bong, Head of Hi Investment & Securities Research Center, commented, "Due to high exchange rates and export improvements, things should be decent. The downward revision of next year's earnings forecasts will not be significant."

Performance by sector is expected to show differences. Park Hee-chan, Head of Mirae Asset Securities Research Center, said, "Semiconductors, power equipment, and K-beauty are expected to perform well, and automobiles are likely to be solid, but most other sectors are expected to be sluggish, with significant downward revisions from current forecasts."

Yoo Jong-woo, Head of Korea Investment & Securities Research Center, noted, "Korean companies are raising overall earnings through upward revisions in IT, utilities, food and beverages, and automobiles. However, sectors related to Chinese investments such as steel and chemicals are experiencing sluggish conditions, which will reduce the earnings growth margin."

There were also views suggesting that export growth rates and economic growth centered on semiconductors may slow down after the second quarter. Kim Seung-hyun, Head of Yuanta Securities Research Center, said, "Earnings forecasts are expected to remain favorable until the third quarter when second-quarter results are confirmed. While the growth in earnings size in monetary terms will continue in the second half centered on semiconductors, the quarter-on-quarter earnings growth rate will peak in the second quarter and momentum will gradually slow."

Risk Management Needed Amid U.S. Election and Earnings Peak-Out Concerns... U.S. Market Remains Strong in Second Half

There was also analysis that if the growth driven by strong exports slows, downside risks for the domestic stock market could increase. Lee Jong-hyung said, "The KOSPI operating profit growth forecast is expected to continue at a high rate of 65.8% this year and 22.2% next year. However, considering possible impacts on corporate earnings from U.S. policy changes after the U.S. election, medium interest rates, and medium inflation, it is appropriate to keep open the scenario that concerns about earnings growth peak-out between the fourth quarter and the first quarter of next year could become an obstacle for the year-end stock market."

Oh Tae-dong stated, "The peak-out point of Korean exports could be a turning point for the stock market, and the timing is expected to be the end of the third quarter."

Accordingly, it was suggested to respond mainly with export stocks in the third quarter but to focus on volatility management from the fourth quarter. Lee Jong-hyung advised, "In the third quarter, when the KOSPI's neglect phenomenon is expected to be resolved, it is appropriate to respond mainly with export stocks such as semiconductors and automobiles, and in the fourth quarter, to manage volatility (risk management) in preparation for election uncertainties and earnings peak-out concerns."

Lee Seung-hoon, Head of IBK Investment & Securities Research Center, said, "Considering the market conditions after reflecting semiconductor industry recovery and interest rate cut expectations, as well as the peak-out risk ahead of the U.S.-Korea economic slowdown in 2025, it is time to build a conservative portfolio."

Advice was also given to select sectors carefully based on profitability and growth before investing. Yoo Jong-woo said, "Although expectations for interest rate cuts remain, market interest rates will still maintain a high level, so selective investment in sectors that can overcome high interest rates is necessary. Investment should be made in sectors that consider both profitability and growth and whose return on equity (ROE) exceeds the cost of equity (COE)." He identified semiconductors, utilities, food and beverages, automobiles, and cosmetics as sectors meeting these criteria.

There were also calls to discover new AI beneficiary sectors and promising small- and mid-cap stocks. Ko Tae-bong said, "The index will remain in a box range until the U.S. election anyway. Rather than leading stocks continuing to rise, a rotation market is expected. Attention should be paid to stocks with good valuations and earnings but less price appreciation, global consumption beneficiaries, and new AI beneficiary sectors." Kim Young-il added, "Until the third quarter, a strategy of increasing weightings with the stock market's upward trend in mind is effective. From the fourth quarter, investment strategies focusing on economic slowdown and interest rate decline cycles are necessary, and discovering promising small- and mid-cap stocks is important rather than large caps."

Meanwhile, the U.S. market is expected to maintain a solid trend in the second half. Accordingly, it was suggested to adopt a dollar-cost averaging strategy during price corrections in the U.S. big tech sector.

Oh Tae-dong analyzed, "The continuation of a strong dollar and high interest rate environment ultimately reflects improvements in U.S. fundamentals, which is a factor that can support a solid trend in the U.S. stock market. Especially, earnings improvements are being driven by large-cap big tech companies, so a dollar-cost averaging strategy focusing on the big tech sector during price corrections is effective."

Kim Seung-hyun said, "With the S&P 500 earnings growth rate expected to be in the 20% range in the second half, stock prices of sectors with high earnings growth rates are expected to rise. Ultimately, I recommend investing in value stocks in the U.S. and Korea with solid fundamentals rather than overvalued stocks with rapid price increases relative to fundamentals. Additionally, holding dollar assets to reduce portfolio risk is effective."

Park Hee-chan advised, "A concentrated portfolio should be built focusing on U.S. big tech and India."