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Credit Suisse raises KOSPI target to 2,600 amid positive outlook for market recovery

By Aug 20, 2020 (Gmt+09:00)

Swiss-based investment bank Credit Suisse has raised its KOSPI target to 2,600 from 2,300 on August 19 on the back of the weakened US dollar and improving short-term economic indicators pointing to a further boost in market sentiment.

Further, investor confidence in laggard sectors should increase on an expected steady rebound in the international Purchasing Managers’ Index (PMI) and on strong stimulus measures rolled out by governments worldwide.

The ongoing weakness of the USD now historically coincides with foreign investors buying into the market and a higher KOSPI, according to Credit Suisse. The spreading of the coronavirus in the US alongside global stimulus measures has led to a steady decline in the dollar index since June. Meanwhile the Korean Won has risen 3.4% against the greenback during the same period.

Also, short-term economic indicators are starting to recover given the low base effect. Eased social distancing in Korea as well as a rebound in retail spending and consumer sentiment are leading to a gradual return to pre-coronavirus economic activity. This is expected to help laggard ‘old economy’ sectors catch up with ‘new economy’ sectors that have outperformed since the coronavirus outbreak, according to the Swiss-based investment bank.

Sectors that had underperformed due to economic uncertainty are preferred, such as tech, autos, and banks, says Credit Suisse. Autos are already back , outperforming the market 20% over the past month, as well as tech, but to a lesser degree.

Credit Suisse also said that the stabilization of downward earnings revisions will help push the market. Earnings revisions have been flat in recent months, but since July some bigger sectors including tech, autos, financials, and the internet have seen upward revisions on a net profit basis.

According to the Swiss-based investment bank, 50%+ of earnings beat forecasts in the second-quarter results season, suggesting that the market has been too cautious on earnings projections. At the current pace, Credit Suisse estimates non-financial operating profits to be flat on a yearly basis in 2020, but to rise by 40% year on year in 2021 riding on the low base effect.

The KOSPI is still in a trough with a 12-month forward P/B of 0.86 times. The 12-month forward return on equity (ROE) has fallen to a 10-year low of 7% due to the global pandemic. Yet, Credit Suisse expects the ROE to rise to 8-9% in 2021, and then to 9%+ in 2022 barring economic uncertainty.

Credit Suisse says the market reflects a return to the normalized level of earnings much quicker than the actual turnaround, making stretched valuations possible -- similar to a precedent seen in 2009. Downward earnings revisions have stabilized backed by a series of earnings beats in the Q2 earnings season, suggesting further legs left in this rally.

Write to Jae-won Park at wonderful@hankyung.com

Danbee Lee edited this article

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