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Samsung Market Strategy Summary

Core Content

This document outlines Samsung Securities' 2H outlook for the Korean stock market, emphasizing a positive trajectory driven by improving corporate earnings, supportive government policies, and a favorable global investment environment. The report also discusses the global investment cycle, reflationary policies, and the impact of US monetary tightening on equity markets.

Main Views

• Positive 2H Outlook for Kospi: Samsung Securities is optimistic about the Korean stock market, expecting the Kospi to continue its upward trend and potentially breach 2,460 this year and reach 2,630 by 2018.
• Risk-on Phase Continues: The global investment cycle is in an expansion phase, with the US Fed's gradual tightening seen as beneficial for equities, as it supports a prolonged risk-on environment.
• Favorable Investment Environment: Global reflation policies are expected to stimulate investment and growth, while the US Fed's cautious approach to tightening will keep equities more attractive than bonds.
• Korea Discount Likely to Improve: The new Korean administration is focusing on protecting minority shareholders, which is expected to reduce the "Korea discount" and improve market valuations.

Key Information

Global Investment Cycle

• The second half of 2017 corresponds with the expansion phase of the global investment cycle, based on output gap analysis.
• The US Fed's tightening is expected to continue gradually, with the earnings yield gap between the S&P 500 and 10-year Treasury yields indicating that equities will remain more attractive than bonds for at least two to three years.
• The risk-on phase is expected to persist, supported by global reflation policies and the new administration's pro-minority shareholder initiatives.

Korea Discount

• Korean equities have historically traded at discounts due to geopolitical risks, corporate governance issues, and low dividend payouts.
• The new administration is addressing corporate governance and minority shareholder protection, which should help reduce the Korea discount.
• The government's policies are unlikely to move the market significantly, as 40% of listed firms' sales come from overseas, with the IT sector being the most export-dependent.

Investment Themes

1. Reflation Policies: Governments are expected to stimulate investment and growth.
2. Earnings Momentum: Corporate earnings are anticipated to remain strong.
3. Valuation Merits: The market is expected to revert to the mean, shedding excessive discounts.
4. Corporate Governance Changes: Reforms aimed at improving transparency and protecting minority shareholders will play a key role in market improvement.

Top 10 Picks

Samsung Securities has identified the following companies as top picks for 2H:

Fiscal Policy and G20

• The G20 summit in July is expected to focus on fiscal expansion, reflation, and structural reforms.
• The IMF's Fiscal Space Indicator (FSI) suggests that major economies have sufficient fiscal space to implement expansionary policies.
• The G20 has historically agreed on coordinated fiscal and monetary policies to support global growth.

US Fed Tightening

• The US Fed is expected to continue its gradual tightening, with two rate hikes in 2H17 and three each in 2018 and 2019.
• Quantitative tightening (QT) is anticipated, which may take five years to complete, with the balance sheet shrinking to around USD2t.
• QT is expected to lift yields but not mimic the effects of quantitative easing (QE), as the impact will be influenced by other factors such as economic growth and inflation.

Conclusion

Samsung Securities maintains a "buy and hold" strategy for equities, expecting the Korean stock market to benefit from both domestic and global factors. The report highlights the importance of corporate governance reforms, reflationary policies, and the continued attractiveness of equities over bonds. The top 10 picks are based on these themes and are expected to outperform in the coming months.