The South Korean stock market is hesitant in 2023. Compared to the high in 2021, all 26 KOSPI industries fell more than -20% until the low in 2022. It is believed that the weak market, which reflects the economic recession, has already been reflected in terms of stock prices.
According to an analysis by an analyst at Hana Securities, the KOSPI net profit estimate for 2023 is revised down by -25% as of December compared to the end of June and is expected to be 150 trillion won compared to 155 trillion won in 2022. After the global financial crisis, the December net profit estimate for 2009 compared to the end of June 2008 was revised down by -31%. Current earnings estimates reflect the possibility of an economic recession and are subject to further downward revisions.
First, falling global prices can lead to falling domestic export prices and product sales prices. Second, the ongoing Chinese re-opening policy and the U.S. short- and long-term interest rate rebound are positive for improving indicators since the first quarter of 2023, but Chinese manufacturing indicators and U.S. consumption indicators, which will be released in January and February, are expected to be sluggish. Third, the company's cost burden will increase (increase in Weighted Average Cost of Capital/WACC) while profitability will deteriorate (decrease in Return on Equity /ROE).
If the KOSPI's net profit estimate follows a similar path to 2009 after the global financial crisis, an additional -6% reduction from the current level will be possible: when applying this, the KOSPI net profit estimate for 2023 will be lowered to 141 trillion won. This returned to the level of 2017-18 before the COVID-19 pandemic. At that time, the KOSPI's average index was 2,300p, similar to today.
Meanwhile, in 2008-2009, when the profit growth rate plunged as it is today, the KOSPI formed a double bottom, and the second low was about 3% higher than the first. As the risk level of credit in the U.S., China, and Korea is decreasing, the second low point is expected to be higher than the first low point when forming the double bottom. Based on the KOSPI, the recent low point is 2,130p, and the second low point is about 3% higher than the first, which is estimated to be 2,200p.
Investment Strategy
Although a downward revision of KOSPI's profit estimate will be inevitable in January, it is believed that it has entered the final stage of passing the low point, and a strategy to expand the share of stocks is needed in the process of forming the second low point.
The First Investment Strategy is the yen, which is expected to strengthen due to the Bank of Japan's monetary policy change. Korea-Japan's long-short strategy targeting steel, shipbuilding, chemical, and IT companies is valid
Next, at a time when market interest rates are higher than growth rates, stock price returns of low PBR stocks were the highest regardless of global economic cycle fluctuations. Among the stocks with relatively low PBR in the industry, it would be better to pay attention to the stocks with ROE higher than WACC and the improved stocks with profit growth (YoY) after the low point in the third quarter of 2022 or the first quarter of 2023.
