[Practical Finance] What Are Investment Strategies to Overcome the September Bear Market Jinx?

Anticipated Interest Rate Cut Priced In
High Possibility of Stock and Bond Weakness
Maintain Maximum Liquidity Allocation

September has traditionally been a weak month in the stock market calendar every year. In the United States, the stock market has consistently ended in a downturn in September over the past four years. This is also confirmed by the numbers. Over the past 10 years (2014?2023), the average September change rates for the KOSPI index and the S&P index were -1.31% and -0.56%, respectively. This is generally because September is the month when Americans have to pay taxes, reducing the cash available for stock market bets.

This year, an additional variable is expected to influence the market. The U.S. Federal Reserve (Fed) is set to implement its first interest rate cut in four years and six months this month. Domestically, the unveiling of the Korea Value-Up Index within this month is emerging as a factor that could influence market momentum. With the new variables of interest rates and value-up added to September, what strategies should investors adopt to respond to the market?

Refer to Past Market Trends After Rate Cuts... Increase Cash Holdings Above the 2730 Level

According to the Korea Exchange on the 4th, the KOSPI showed a gradual recovery after falling nearly 12% in early August due to concerns over slowing U.S. employment, but it still has not surpassed the closing price level at the end of July. On the 2nd, the KOSPI closed at 2,681.00, up 6.69 points (0.25%). Foreign investors returned to buying after seven trading days, ending the session with a slight gain.

Experts believe that volatility in the domestic stock market is inevitably expanding due to uncertainties surrounding the U.S. presidential election and the Federal Open Market Committee (FOMC) impact. Kim In-sik, a researcher at IBK Investment & Securities, said, "Due to the reversal following the pre-reflection of rate cut expectations and growing concerns about economic instability, stocks and bonds are likely to underperform," adding, "Since a volatile market is expected to continue, liquidity should be maintained at the maximum proportion."

In the securities industry, it is advised to respond to the market by referring to past market trends following interest rate cuts. Yang Il-woo, a researcher at Samsung Securities, said, "In all three past instances when the Fed cut rates, the stock price trends in the first month after the cut and the subsequent several months moved in opposite directions, so investors should check whether there is a bubble, where it is, and whether it is excessive before investing."

There is also an analysis that the market may not respond favorably to the event of an interest rate cut. Kim Dae-jun, a researcher at Korea Investment & Securities, explained, "Central banks tend to lower rates when the economy is unstable. The problem is that the stock market does not immediately rebound just because rates are lowered," adding, "Uncertainty over the U.S. presidential election is also a burden, and policy effects cannot be expected in the U.S. for the time being. This is a disappointing factor for the stock market, which has weakened rebound potential after the sharp drop in August."

Since there are no factors in the economy or policy to boost stock prices, the stock market is expected to remain sideways for the time being. Kim suggested adopting a defensive stance while looking for opportunities for market rebounds. He said, "Since the market is exposed to policy uncertainty ahead of the U.S. presidential election, it is necessary to postpone aggressive weight increases for a while," adding, "Building a defensive portfolio over the next two to three months will contribute to improving expected returns."

Daishin Securities projected the KOSPI range for September to be between 2550 and 2750, expecting the domestic stock market to show a strong start followed by weakness. Lee Kyung-min, a researcher at Daishin Securities, warned, "We need to be cautious of the historically weakest September seasonality (liquidity contraction), monetary policy issues, and increased pressure from yen carry trade liquidation," advising, "Accordingly, above the 2730 level on the KOSPI, it is advisable to reduce stock holdings or increase cash holdings to manage risk, and if volatility expands at the end of September or early October, use it as an opportunity to increase holdings."

Value-Up as an Investment Alternative... Focus on Companies with Corporate Value Enhancement Plans

There is an alternative to respond to the market: value-up.

The Korea Exchange plans to announce the 'Korea Value-Up Index' this month. After the second value-up guideline was announced at the end of May, value-up beneficiary stocks briefly led the stock market, but the driving force weakened afterward. There is now a forecast that value-up could again act as a momentum driver for the stock market this month.

Yoo Myung-gan, a researcher at Mirae Asset Securities, said, "Value-up is a good investment alternative during times of high uncertainty such as the U.S. presidential election and increased concerns about corporate earnings," advising, "Considering cash flow and return on equity (ROE) levels, the automobile, banking, and insurance sectors are favorable choices."

Labor Gil, a researcher at Shinhan Investment Corp., said, "Stocks or sectors included in the (value-up) index are expected to attract attention from a supply-demand perspective," adding, "Even if not included in the value-up index, the downside in terms of returns is likely limited." This is because the index announcement serves as a reminder for related stocks, potentially acting as a favorable event for the stock market.

There is also an opinion that to secure returns as value-up beneficiaries, attention should be paid to companies that have announced or disclosed value-up plans. Researcher Yang Il-woo said, "If all financial stocks were favorably evaluated in August, in September it may be advantageous in terms of returns to focus on companies among banks, securities, and insurance that have definite corporate value enhancement plans."

Shinhan Investment Corp. suggested domestic stocks, won appreciation, and shareholder returns as sector keywords to replace technology and export stocks, which heated up the stock market in the first half of the year. Researcher Labor Gil said, "Due to ongoing doubts about the U.S. economy and the decline in the won-dollar exchange rate, it will take time for export stocks to regain leadership," adding, "As alternatives, domestic stocks, beneficiaries of won appreciation, and stocks related to the value-up program are worth considering."

There was also a suggestion to focus on low-beta sectors with strong defensive capabilities. Researcher Kim Dae-jun said, "Healthcare, telecommunications, and utilities are representative," explaining, "These sectors have favorable earnings momentum and are not exposed to selling pressure related to supply-demand."

Shinyoung Securities emphasized the need to build a portfolio in preparation for a mid-inflation, mid-interest rate era. Park So-yeon, a researcher at Shinyoung Securities, said, "In the medium term, this volatility should be used as an opportunity to rebalance portfolios," adding, "If this rate cut is made as a readjustment of real interest rates, alternative assets will outperform bonds, and value stocks and high-dividend stocks will outperform growth stocks."