Turning Point Not in Sight
The authors are analysts of NH Investment & Securities. They can be reached at michelle.cho@nhqv.com and junsup@nhqv.com, respectively. -- Ed.
Based on our comparative analysis of past financial crises and the current Covid-19 outbreak, we believe that the domestic financial industry faces a potential drop in growth and profitability and share price volatility if the current outbreak leads to a recession. For defensive investment amid the current downward pressure, non-life insurers appear relatively strong versus securities/banking plays (more sensitive to economic conditions) and life insurance stocks (very vulnerable during low growth/interest rate cycles).
Then and now
The Covid-19 outbreak has increased downside risk in the economy, and the financial sector is not insulated from uncertainty over future earnings and share price volatility.
With concerns over a global economic downturn on the rise, we highlight the importance of a comparative analysis of the current outbreak and past financial crises. During the global financial crisis in 2008: 1) growth and profitability in the Korean financial sector were severely damaged, and it took at least two years for conditions to normalize; 2) asset quality deteriorated; 3) capital adequacy declined; and 4) valuations turned volatile, with the degree of change ranging between 69-116%.
Supply/demand: Foreign/institutional investors vs. retail investors
Looking at the supply-demand landscape for the domestic financial sector this year, foreign/domestic institutional investors and retail investors have shown contrasting patterns. Specifically, foreigners/domestic institution’s combined net selling (of banking, securities, and insurance shares) has totaled W1.5tn YTD, while retail investors have net bought at a similar scale.
Inflection point: ‘False hope’ ? how long will it last?
We believe catalysts are still lacking that can bring about an inflection point in terms of share price rebounds and valuation re-ratings. In our view, a turning point will only be reached if: 1) concerns towards an economic recession subside; 2) rate cut cycles come to an end; and 3) financial regulations ease. As the spread of Covid-19 has deepened short-term stock price adjustments, rebounds might occur, but the question of sustainability will remain.
Relative defensive ability amid economic downturn: Non-life > Securities/Banking > Life Insurance
In terms of domestic financial plays’ defensive ability, we believe that non-life insurance stocks are likely to fare better, as securities/banking stocks are more sensitive to economic conditions and life insurance stocks are very vulnerable during low growth/interest rate cycles.