KOSPI Expected to Fluctuate between 2,200-2,500p in July
The author is an equity strategist at Shinhan Investment Corp. He can be reached at dk.noh@shinhan.com. – Ed.
Stock market conditions present a rebalancing opportunity
We believe the upside for stock market indices if the economy does not enter a recession is now larger than the downside in the event of an actual recession. One-year returns on stock market investments are more likely to turn out positive than negative with the KOSPI's 12 month-forward PER below 9x. The downward trend line seen in the three-year return scatter plot points toward higher returns for longer-term investments. Given recession risks and potential market downside, we see limited gains from divestment at this point and instead recommend using the opportunity to rebalance stocks.
KOSPI reflecting expectations for a decline in 2H22 earnings consensus
KOSPI earnings momentum is likely to decline from July given the recent downturn of the Citi Economic Surprise Index, which is typically followed by the KOSPI earnings revision ratio at a time lag of three months. Even after a significant decline in forward earnings forecasts, we expect the KOSPI to find bottom at around 2,100p. The KOSPI’s 12-month forward EPS is likely to reach 220p levels by the end of the year. After undergoing sharp correction, the KOSPI will likely recover somewhat toward the end of the year with an inflection point expected on downward stabilization of oil prices.
KOSPI to fluctuate between 2,200-2,500p in July
We expect the KOSPI to move between 2,200p and 2,500p in July. As the downward revision of KOSPI earnings consensus is projected to begin in earnest from July, earnings-based valuations do not yet appear reliable. Trailing PBR, which does not reflect earnings forecasts, should fluctuate within 0.9-1.0x. We recommend investment strategies focusing on: 1) companies that have shown visible growth through capex spend in 1H22; 2) defensive stocks with low margin volatility; and 3) nuclear power and semiconductor stocks in line with the government's long-term policy goals.