Korea Investment & Securities has set the upper bound for the KOSPI this month at 9,500 and recommended increasing exposure to semiconductors and information technology (IT) sectors. While individual investor funds are supporting the market amid continued foreign selling, the supply-demand imbalance is deepening, requiring an earnings-focused approach, the brokerage said.
According to the financial investment industry on the 4th, Korea Investment & Securities said in a report that "the KOSPI is expected to continue its upward trend this month," adding, "However, this is not a market that rises without pauses, and volatility could widen on concerns over prolonged high interest rates." The brokerage projected the KOSPI to fluctuate between 8,500 and 9,500 this month.
Geopolitical uncertainty surrounding the Middle East was cited as a burden. While a possible ceasefire between the United States and Iran has been mentioned, time is needed before crude oil supply normalizes, meaning the high interest rate environment driven by high oil prices could persist, the report explained.
However, the inflow of individual investor funds was assessed as a positive factor for the stock market. "With foreigners engaging in large-scale net selling ahead of rising exchange rates and mega-sized initial public offerings (IPOs), individuals are defending the market," the report said.
The issue is that buying is concentrated in certain sectors such as semiconductors and IT. Korea Investment & Securities said, "The KOSPI is holding up because IT accounts for a high share of the domestic stock market," adding, "If expectations for artificial intelligence (AI) growth continue, there is room for additional upside."
U.S. monetary policy was also pointed out as a key variable. The Taylor rule-based interest rate currently stands at 6.55%, well above the upper bound of the U.S. benchmark rate at 3.75%, meaning conditions do not warrant a rate hike by the Federal Reserve (Fed), yet market rates are rising in advance.
Caution is warranted regarding recent foreign supply-demand flows, the brokerage noted, as foreign ownership is rising even though foreigners are engaging in large-scale selling. "In a structure where individuals fully absorb the large-cap shares being unloaded by foreigners, the stock market's upward momentum weakens," the report said. "The market could shift into a polarized environment where only the industries that individuals are buying move."
Accordingly, the core of the investment strategy boils down to earnings. To secure portfolio stability amid increased market volatility, investors should focus on the profits companies generate, the report explained. "What can defend earnings with high competitiveness in the Korean economy is the core IT sector, including semiconductors," Korea Investment & Securities said. "Although price volatility has increased due to the outflow of foreign funds, the IT-led market rally is not yet over."
