Kospi Set to Pause After 30.61% Monthly Surge as Analysts Favor Sector Rotation

Kospi jumps 30.61% over the past month

Market enters phase of easing short-term overheating

Earnings-driven uptrend remains intact

South Korea’s stock market is entering a phase of consolidation this week, from May 4 to May 8, after a sharp run-up, according to local brokerages. They expect the earnings-driven rally in select stocks to continue.

The Kospi has surged 30.61% over the past month, according to Korea Exchange data released on May 3. Lee Kyung-min, an analyst at Daishin Securities, said short-term overheating concerns and rally fatigue have built up.

He said the medium- to long-term uptrend remains intact as long as it is supported by earnings. In the short term, however, investors should factor in fluctuations as optimism cools and the gap between expectations and reality narrows.

That backdrop is prompting calls for short-term sector-rotation trades and accumulation of market leaders. Lee said domestically focused stocks, including internet, pharmaceutical and biotech names, have a high chance of benefiting from rotation because they have lagged and remain relatively undervalued.

That should help limit downside. In the near term, investors should focus on sector rotation while keeping exposure to leaders such as semiconductors, automakers, secondary batteries, shipbuilders and defense stocks, and raise positions on increased volatility, he added.

Holiday closures across major markets, including South Korea, are also one reason the Kospi may take a breather. Kang Jin-hyuk, an analyst at Shinhan Securities, said the market could pause as exchanges are closed on May 4 in China, Japan and the U.K.; on May 5 in South Korea, China and Japan; and on May 6 in Japan.

Kang also pointed to a potential boost in inbound tourism demand from Japan’s Golden Week holiday from April 29 to May 6 and China’s Labor Day holiday from May 1 to May 5. He said investors should watch whether strong earnings continue in consumer sectors such as hotels and leisure, cosmetics and retail.

The Federal Reserve’s hawkish decision to keep rates unchanged could also weigh on sentiment. Kang said the benchmark rate was left unchanged at the Federal Open Market Committee meeting, and some officials objected to dovish wording in the statement, a stance the market interpreted as hawkish.

Still, analysts expect any resulting volatility to remain limited. Lee said global equities have shifted from a liquidity-driven rally to a macro-and-earnings market since the second half of last year.

This year, that pattern has become more pronounced, with stock moves increasingly determined by fundamentals such as economic conditions and earnings rather than changes in monetary policy, he said.

The prevailing view is that the Kospi’s current rise is being driven entirely by earnings. Lee said 12-month forward earnings per share have stepped up as the first-quarter earnings season gets into full swing.

As a result, the forward price-to-earnings ratio is only 7.35 times despite the index’s run to record highs, he said. Kim Jong-min, an analyst at Samsung Securities, said strong earnings led by U.S. big tech and South Korean chipmakers are offsetting macro headwinds.

He added that signs of improving global liquidity, together with a Korea-specific money move into equities, are providing firm downside support for the market.

Lee Su, Hankyung.com reporter (2su@hankyung.com)