20160615-三星证券-2H_outlook_and_top_picks_Worst_over,_but_full-blown_Kospi_uptrend_to_prove_elusive_39页_1mb

Samsung Market Strategy Summary

Core Content

This document outlines the Samsung Strategy Team's analysis and outlook for the second half of 2016, focusing on global economic conditions, Korean corporate earnings, and investment strategies for the Korean stock market.

Main Points

1. Global Demand and Korean Exports

• Developed Markets (DMs) have been growing on domestic demand since mid-2013, while Emerging Markets (EMs) have remained weak, relying heavily on exports.
• Korea's non-OECD-bound export exposure was at 66% in 2015, but final demand is only 51.8%.
• A rebound in DM demand is expected to be more beneficial for Korean exports than it initially appears.
• The US ISM Manufacturing Index rose to 51.3% in May, showing a recovery, while the JP Morgan Global Manufacturing PMI fell to 50, indicating weak EM manufacturing momentum.

2. Korean Corporate Earnings

• Korean firms have seen stagnant sales since 2013, similar to Japanese firms post-bubble burst.
• MSCI Korea operating profit dropped to KRW81.28t in 2014 but rebounded to KRW96.86t in 2015, driven by "other cyclicals".
• Other cyclicals are expected to improve margins through cost-cutting, though commodity price increases could pose challenges.
• Kospi 12-month-forward EPS growth is estimated at 16%, but the index may only rise if the outlook improves or profit growth exceeds expectations.

3. Portfolio Strategy for 2H 2016

• Investment strategy includes three main areas: exporters, interest-sensitive stocks, and structural-growth stocks.
• Exporters: Focus on Samsung Electronics and firms in the 3D NAND and flexible OLED supply chains. Cosmetics exports have shown strong growth.
• Interest-sensitive stocks: Banking stocks are expected to improve due to US Fed rate hikes and restructuring in over-supplied industries.
• Structural-growth stocks: Media and internet stocks are highlighted due to their unique business models and expansion into other Asian markets.
• Style preference: Emphasis on large caps, value stocks, and dividend stocks.

4. Key Factors Influencing the Market

• Fed's future stance and its impact on financial markets.
• Eurozone TLTRO2 implementation and its effect on inflation and credit conditions.
• Korea's restructuring via the "One-Shot Act" effective Aug 13.
• Geopolitical risks, including North Korea and the UK's Brexit referendum.

5. Investment Strategy for 3Q and 4Q

• 3Q is expected to see high stock market volatility due to US Fed rate hike possibilities and manufacturing sector recoveries.
• 3Q strategy: Use volatility to increase equity exposure, focusing on exporters, interest-sensitive stocks, and structural-growth stocks.
• 4Q strategy: Buy and hold with continued focus on the same sectors.

6. Risks to Forecasts

• Uncertainty over US Fed rate hikes and their impact on EM currencies.
• Brexit outcome could dampen investor sentiment and reverse eurozone growth.
• Chinese corporate debt and banking sector concerns due to non-performing loans and debt restructuring.
• Korea's EM export exposure is rising, potentially affecting economic stability.

Key Information

• Kospi target range for 2016: 1,820-2,080.
• Expected 2H movement: 1,880-2,080.
• Top 10 picks include companies from Materials, Industrials, Consumer, Discretionary, and Financials sectors.
• China's corporate debt-to-GDP ratio reached 170.8% by end-2015, indicating structural economic challenges.
• China's incremental capital-output ratio (ICOR) increased from 3.9 (1998-2007) to 6.0 (2010-2015), suggesting less efficient growth.
• Eurozone economic growth is expected to continue, supported by low oil prices, improved employment, and ECB monetary easing.
• US rate hikes are likely in 2H, but impact on EM currencies may be less severe than previously anticipated due to better EM fundamentals and more expansionary DM policies.

Summary Table

Conclusion

The Samsung Strategy Team anticipates a gradual recovery in the global economy, particularly in developed markets, which will have a positive impact on Korean exports and corporate earnings. They recommend a cautious approach in the short term and a three-pronged portfolio strategy for 2H 2016, emphasizing exporters, interest-sensitive stocks, and structural-growth stocks. Volatility in 3Q presents an opportunity to increase equity exposure, while risks such as Brexit, Chinese debt restructuring, and EM currency weakness remain a concern. The team maintains a Kospi target range of 1,820-2,080 for 2016 and expects the index to move within 1,880-2,080 in 2H.