[Second Half Investment Strategy] Semiconductors Are 'Essential'... Secondary Batteries Are 'Optional'

The Domestic Stock Market in the Second Half as Seen by the Asset Management Industry
Export-Driven Sectors Like Semiconductors, Automobiles, and Cosmetics Show Promise
Risk Management Crucial Amid Numerous External Variables

The asset management industry identified the U.S. presidential election and major countries' monetary policies as external variables that could impact the domestic stock market in the second half of this year. Among sector-specific issues, the production schedule of Samsung Electronics' high-bandwidth memory (HBM) was highlighted as a variable that could affect the overall stock market. It is expected that once Samsung Electronics begins supplying HBM to Nvidia in earnest, the domestic stock market?which underperformed the global stock market in the first half of the year?will be re-evaluated. The semiconductor and automobile sectors are likely to remain leading sectors in the second half of the year, given the continued upward trend in earnings forecasts.

Attention Focused on Semiconductors Leading Exports... Interest in Oversold Sectors

In the first half of this year, the KOSPI rose 5.4% compared to the end of last year, while the KOSDAQ index fell 3.0%. Compared to the Nasdaq Composite Index's 17.5% increase during the same period, the domestic market underperformed relatively. However, as earnings forecasts for domestic listed companies continue to be revised upward, the attractiveness of undervaluation has increased. Regardless of the stock market's sluggishness, exports have steadily increased. In June this year, South Korea's exports reached $57.1 billion, up 5.1% year-on-year, marking nine consecutive months of positive growth. By product category, exports of semiconductors (51%), displays (26%), and computers (59%) were robust. The semiconductor export amount of $13.4 billion surpassed the previous record of $13.1 billion in March 2022, marking the largest scale ever. Exports in the third quarter of this year are expected to increase by 8% year-on-year. With a strengthened fundamental base, expectations for stock market gains in the second half of the year are high.

Samsung Electronics HBM3E 12H DRAM Product Image

Jungsoo Kim, Head of Research at Mirae Asset Global Investments, explained, "We expect the KOSPI to rise in the second half of the year, centered on semiconductors and value-up related sectors," adding, "The market has moved away from a downward earnings trend and now has high earnings visibility." He continued, "Among major countries' stock markets, the valuation attractiveness relative to earnings growth rate is high," noting, "The KOSPI price-to-book ratio (PBR) is around or below 1 times."

Seunghoon Oh, Head of Investment Research Center at Samsung Asset Management, also analyzed, "Considering the export base in the fourth quarter of last year, the peak of export and earnings growth rates is estimated to be from the end of the third quarter to the beginning of the fourth quarter this year," adding, "Earnings improvement in the third quarter, increased exports to the U.S., recovery of semiconductor exports to China, and the Bank of Korea's base rate cuts are factors for valuation expansion."

The asset management industry identified the semiconductor and automobile sectors as promising sectors for the second half of the year, considering earnings forecast trends and external variables. With rising DRAM semiconductor prices, SK Hynix and Samsung Electronics' earnings are expected to increase quarterly in the second half of this year. The automobile sector is expected to attract attention as efforts to enhance shareholder value will be added along with earnings improvements if value-up indices and follow-up measures are introduced. The shipbuilding sector and pharmaceutical, cosmetics, and food sectors are also expected to see earnings growth. The cosmetics and food sectors are experiencing external growth as they gain popularity in markets worldwide, including the U.S.

Sangwon Lee, Head of Product Strategy at Korea Investment Management, expressed expectations, saying, "As demand for artificial intelligence (AI) semiconductors surges, demand for semiconductors and power, including HBM, will increase," adding, "The supply infrastructure sector is promising."

Opportunities to increase returns can be found not only in promising sectors but also in oversold sectors. Sectors with low expectations often rebound simply through psychological improvement. Even sectors that performed poorly in the first half of the year can experience a strong rebound if signs of earnings recovery appear or discount factors on stock prices are resolved. This is why attention should be paid not only to promising sectors but also to oversold sectors.

Ilwoong Jo, Head of Equity Management at Hanwha Asset Management, explained, "The reason for the slow recovery of the domestic stock market compared to major global markets based on year-to-date returns is due to Samsung Electronics' underperformance and the stagnation of the secondary battery sector caused by a slowdown in electric vehicle sales," adding, "Samsung Electronics' underperformance is due to slower HBM production plans compared to competitors."

If Samsung Electronics begins supplying HBM to Nvidia in earnest in the second half of this year, a rebound in Samsung Electronics' stock price and a re-evaluation of the domestic stock market will be possible. If expectations for increased electric vehicle sales revive around the second half of this year, the secondary battery sector's stock prices can also recover. The launch of mid- to low-priced electric vehicles is creating conditions for increased electric vehicle sales. Given the many variables, competition among leading stocks is expected to be fierce in the second half of this year. Experts advise that investing in promising sectors does not guarantee profits, so risk factors must be carefully considered.

U.S. Presidential Election and Economic Slowdown as 'Variables'... ETF Investment 'Recommended'

For asset management companies that must invest client funds to generate returns, it is important to allocate and manage assets based on forecasts. The index flow may not proceed as expected, and the volatility of promising sector stock prices may be greater than anticipated. When flows differ from forecasts, stock weightings should be flexibly adjusted considering various variables. Tracking and monitoring risk factors is crucial. Currently, the asset management industry is concerned about the U.S. presidential election and economic slowdown. Center Head Seunghoon Oh warned, "We must be cautious about the slowdown in earnings improvement in the fourth quarter, policy uncertainties following the U.S. presidential election results, and concerns about a U.S.-centered global economic slowdown," adding, "The depreciation of the Korean won may also stimulate foreign investors' desire to realize profits."

Hyoseop Shim, Head of Equity Management at KB Asset Management, said, "The second half of this year will see high volatility due to events such as the announcement of value-up indices and U.S. interest rate cuts," adding, "Attention should be paid to whether interest rates will be cut and the U.S. presidential election."

On the 27th of last month, U.S. presidential candidates President Joe Biden and former President Donald Trump participated in a TV debate, and since then, evaluations have emerged that former President Trump's chances of winning have increased. If major economic policies change within the U.S., the impact on the domestic industrial sector will not be insignificant. Head Ilwoong Jo explained, "If the Republican Party wins the U.S. presidential election, it could negatively affect the domestic stock market," adding, "There are concerns about the reduction or abolition of subsidy policies for top market capitalization companies such as domestic automakers, secondary batteries, and solar power under Republican governance."

Meanwhile, as the investment environment changes rapidly, many investors prefer indirect investment over direct investment. Among various indirect investment products, exchange-traded funds (ETFs) are still judged to meet domestic investors' needs. In the first half of this year, thematic ETFs centered on AI and semiconductors gained popularity. The total net asset value exceeded 150 trillion won. It increased by more than 50 trillion won in one year since surpassing 100 trillion won in June last year.

Dividend stock funds following the implementation of value-up and public offering stock funds due to the revitalization of the initial public offering (IPO) market were also identified as promising products for the second half of the year. Ahead of next year, when the effects of the dividend system advancement policy will fully appear, interest in domestic dividend stocks is expected to grow toward the end of the year. Large companies are strengthening their dividend payout ratios. Since last June, when the fluctuation range compared to the public offering price on the listing day was expanded, funds have been flowing into the IPO market. Institutional investors participating in demand forecasting are steadily accumulating profits through public offering stock investments.