Korea Investment & Securities Co. said the pressure for higher Government Bonds yields has eased as U.S. employment indicators slowed, lowering the likelihood of further declines in the KOSPI. It advised that, as buying that had been concentrated in specific sectors is spreading to others, investors should select sectors based on foreign inflows and earnings rather than the index direction going forward.
Researcher Kim Dae-jun at Korea Investment & Securities Co. said in a report on the 10th, "With the upper bound of U.S. Treasury yields constrained, investors should focus on sectors with potential for earnings improvement," adding, "Attention is needed to distribution, transportation, and health care, where foreign inflows have improved based on earnings outlooks."
On the 7th, U.S. bond yields fell across the curve. Nonfarm payrolls for July fell by 23,000, contrary to the market expectation of an 80,000 increase, confirming a slowdown in hiring. As a result, the likelihood of additional rate hikes by the Federal Reserve (Fed) decreased, easing some of the burden from prolonged high rates.
Caution over the U.S. consumer price index (CPI) to be released on the 12th has also lessened from before. The University of Michigan's 1-year inflation expectations and the hourly wage growth rate have slowed, and the Institute for Supply Management (ISM) manufacturing price index has come down from its peak, increasing the likelihood that inflationary pressure will weaken.
Kim also said that if U.S. Government Bonds yields stabilize, the outflow of liquidity from the domestic stock market due to a strong dollar could diminish. The KOSPI has posted negative weekly returns for seven straight weeks and has undergone a sharp correction centered on semiconductors.
Recently, the internal dynamics of the market have been changing as well. Even though the KOSPI fell on a weekly basis last week, 86% of all stocks rose. That contrasts with the previous four weeks, when the share of rising stocks was below 50%. In the KOSPI200, the equal-weighted index outperformed the market-cap-weighted index, indicating that buying is spreading beyond large caps.
Forced-selling pressure has also eased significantly. On the 6th, the size of margin-call liquidations was 10.7 billion won, and the ratio relative to unsettled balances was 1.0%. Much of the forced liquidation volume, which had previously swelled to as much as 100 billion won per day, has been absorbed, reducing the likelihood of greater volatility from additional supply shocks.
Foreign investors are also selectively buying by sector. Last week, foreigners were net buyers of distribution, transportation, health care, and food and beverage. Distribution and transportation have upwardly revised third-quarter earnings outlooks, health care is expected to benefit from attractive valuations and sector diversification, and food and beverage stands out for its defensive nature and second-quarter results.
Kim emphasized, "As volatility has decreased, sector selection and diversification have become more important than sharp moves in the index itself," adding that investors should focus on sectors where foreign inflows and earnings improvement are both confirmed.