The author is an analyst for NH Investment & Securities. He can be reached at bk@nhqv.com -- Ed.
Global stock markets have rallied of late, with the S&P500 surging for four months in a row. In February, the Kospi has outperformed other major markets. But, the fast market growth is likely to bolster profit-taking appetite. There are also negatives including ex-dividend impacts on stocks related to the Corporate Value-up Program, and the possibility that hardline conservative policies will come under the spotlight following Super Tuesday. That said, unless the Fed turns hawkish, the stock market should continue to rally on sound economic conditions and solid earnings. Against this backdrop, we advise stock-buying upon any correction in 1H24
I. Investment strategy: Unless Fed changes tack...
- The S&P500 has rallied for four months in a row, and in February, the Kospi has grown faster than any other market
- With rapid market growth raising valuation burden, profit-taking appetite is picking up among investors. Also, we expect ex-dividend effects for low P/B stocks, and Trump’s policies are likely to come under the spotlight following Super Tuesday
- The Korean stock market is currently at an appropriate level relative to the size of the economy, and the dollar-based Kospi is still in a box range. Although the level of earnings momentum for 1Q24 remains uncertain, we believe that Kospi adjustments will present buying opportunities, forecasting sound export growth in 1H24. We anticipate further upside, following the index’s move out of its box range
II. Quant: Corporate Value-up Program reminiscent of 10 years ago
- Korea’s Corporate Value-Up Program: The government is considering offering tax benefits. Efforts are also underway to improve the treasury stock system
- The Corporate Value-Up Program is largely similar to the three major tax benefits that were introduced 10 years ago to boost household income. Through the adoption of both penalties and incentives on shareholder returns, dividends, treasury stock buybacks, and ROE were all expanded. Value stocks performed strongly over 2014~2017
- In 2024, downward rigidity should strengthen for low P/B stocks. In Korea, demand for shareholder return tends to strengthen around the March general shareholders’ meeting season. This should contribute to supporting the prices of value stocks
- In the case of Japan, its government-driven corporate value-up program was more effective in boosting P/Bs for large caps (by 0.2x) than small/mid-caps
- We advise paying attention to the financial, auto/parts, and holding company sectors in light of expectations for shareholder return. We like firms that have low P/B levels but high retention ratios or are likely to show ROE improvement
- We advise investment upon profit-taking following the announcement of the Corporate Value-Up Program. Changes in record dates are also likely to present buying opportunities
III. Investment idea: Growth stocks and M&A-related plays
- An environment conducive to large companies pursuing M&As of start-ups is being created. With interest rates to fall, large players in the IT and biotech sectors are forecast to embark on M&A deals. We expect that M&As will catalyze growth for big tech companies and bring valuation re-rating for new drug developers. Such developments promise to trigger re-ratings for Korean plays as well. We advise paying attention to Internet platform companies and anti-cancer drug developers
→ Preferred plays for March: SEC, SK Hynix, KAI, HMC, Samsung C&T, KBFG, DI Dong Il, NAVER, and Yuhan