‘Earnings Recession’ Signals More Pain for South Korean Stocks
‘Earnings Recession’ Signals More Pain for South Korean Stocks
(Bloomberg) -- Earnings growth of South Korea’s largest companies is seen slowing in the second half, which would mark the worst annual profits in at least 18 years. The “earnings recession” can only mean more pain for stock investors, analysts say.
The aggregate earnings per share of Kospi index companies fell 44% in the second quarter from a year earlier, the most among all benchmarks in Asia, according to data compiled by Bloomberg. That follows a 34% slump in the first period. Adding to the gloom, the government said Tuesday that inflation slid to a record zero in August and the economy grew slower than an original estimate in the second quarter.
“There’s been a broad weakness across the board for earnings,” said Erik Zipf, who runs a $447 million emerging-market fund at DuPont Capital Management, in a telephone interview from New York. “The domestic economy is not doing fantastic, and exports are being negatively impacted by trade things going on.”
The benchmark Kospi index is down 11% this year in U.S. dollar terms, the worst performer in the region. The export-reliant economy, whose companies supply most of the world’s electronics and semiconductors, has borne the brunt of a prolonged U.S.-China trade spat. A diplomatic row with Japan that resulted in export curbs to South Korea has also hurt manufacturing at home.
“Investors are extremely cautious about Korea stocks -- they don’t even do bottom-up stock picking any more,” Hana Financial Investment analyst Lee Kyung Soo wrote in an Aug. 28 report. “Value stocks are everywhere in Korea as they fell too much. Any optimism about the Korean stock market vanished long ago.”
In the second quarter, companies in all sectors missed earnings estimates, according to Hana Financial. Total operating income of Kospi index stocks are estimated to drop 24% in the 2019 financial year, according to data compiled by Bloomberg. That will be the sharpest drop since Bloomberg started compiling the data in 2002.
“The problem is analysts are cutting estimates for the coming quarters, which means earnings are not hitting bottom yet,” Hana’s Lee wrote. “It is meaningless for analysts to talk about ’undervalued stocks’ as growth is so weak.”
Aggregate earnings per share for the third quarter are expected to fall 27% year-on-year, according to data compiled by Bloomberg. That’s before an estimated 32% gain in the last quarter of the year -- but that’s from a low base a year ago.
“The Korea stock market may turn around starting from the end of 2019 or in early 2020, along with a rebound in corporate earnings,” said Woong Park, chief executive officer at Eastspring Investments in Seoul. “Experts say the memory chip industry is expected to bounce back no later than the first half of 2020.”
--With assistance from Michael Soviner.
To contact the reporters on this story: Heejin Kim in Seoul at hkim579@bloomberg.net;Myungshin Cho in Seoul at mcho38@bloomberg.net
To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Teo Chian Wei, Naoto Hosoda
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