Shinhan Investment Corp. said that as the KOSPI held its 200-day moving average, confidence in a short-term rebound has increased, but it is too early to conclude this as a recovery of the medium-term uptrend. It noted that in the past, after defending the 200-day line, a relatively strong rebound appeared for 10 to 20 sessions, but as time passed, corporations' earnings outlooks split the direction of share prices.
On the 19th, Noh Dong-gil, a researcher at Shinhan Investment Corp., said in a report, "The 200-day line has raised confidence in a short-term rebound but has not determined the medium-term direction," adding, "What the 200-day line told us was only the starting point of the rebound."
The KOSPI plunged 38.6% in 27 sessions on June to July. Doubts over artificial intelligence (AI) capital spending triggered the correction, and internal supply-demand instability in the domestic market, such as leverage unwinding and heightened volatility, widened the losses. It briefly dipped below the 200-day line but recovered quickly, and as of on the 18th, it had retraced 36.2% of the decline from the bottom.
Past cases show the effect of defending the 200-day line was concentrated in the short term. An analysis by Shinhan Investment Corp. of 19 correction phases when the index first approached the 200-day line during a trend rise found that in 10 cases it returned above the 200-day line within five sessions without a significant break. Their subsequent 10-session and 20-session returns were 6.6% and 5.6%, respectively, far exceeding the -1.4% and -1.9% of the failed-defense cases.
However, after 60 sessions, the difference almost disappeared. The probability of a rise was 60% when the 200-day defense succeeded, and 56% when it failed. This means it raises the likelihood of extending a short-term rebound, but it is hard to judge where the market will be in two to three months based on the 200-day line alone.
It also saw it as early to conclude the rebound is already over. Looking at nine cases where more than 35% of the decline was quickly recovered within about 10 sessions after the first approach to the 200-day line, the median of the maximum retracement over the next 60 sessions was 65%. In eight of the nine cases, more than half of the decline was recovered once. However, a "V-shaped rebound" that immediately regains the previous high was not the typical path.
In the end, it picked the direction of earnings per share (EPS) as the variable that will determine the market's medium-term direction. Right after share prices underwent a large correction in the past, the earnings outlook appeared solid, but over time the results diverged. In 2010, as the semiconductor EPS uptrend continued, the price correction was limited to a valuation shock, but in 2018 and 2024, the EPS outlook was downgraded belatedly, and the early warning from the prior price drop materialized.
It assessed that semiconductors are again at a crossroads. From June 19 to Aug. 14, the KOSPI semiconductor industry index fell 31.4%, but over the same period the 12-month forward EPS rose 14.5%. As a result, the 12-month forward price-earnings ratio (PER) plunged 40.1% to 4.02 times. This is at the bottom 0.1% level since 2000.
However, it cautioned against judging semiconductors as unconditionally cheap just because the PER is 4 times. To explain the current price at a PER of 7.40 times, which is in the bottom 25% historically, future EPS would have to be 45.7% lower than the current market outlook. That is a larger downgrade than seen in 2018 and 2024.
Noh said, "What matters is not the PER of 4 times itself, but that even if we explain the current price with a bottom-25% PER level, a 45.7% EPS downgrade versus consensus is required," adding, "The low PER suggests that the market's confidence in the sustainability of semiconductor earnings has fallen sharply."
So far, sharp deterioration in fundamentals has not been confirmed in the real-economy indicators. Since the end of July, the DRAMeXchange (DXI) semiconductor spot price index and DDR5 spot prices have risen 3.6% and 3.5%, respectively. By contrast, the market's bar for corporations' future earnings is gradually falling, making it difficult to conclude whether current semiconductor share prices are excessively cheap or have already priced in an upcoming slowdown in results.
As an investment strategy, it kept semiconductors as a core holding industry, but saw further overweighting as appropriate only after confirming a re-upgrade in the earnings outlook. Among non-semiconductors, it viewed shipbuilding and cosmetics relatively positively, where EPS improvement is driving gains rather than recent share prices.