Co-host1Agenda:Time (HKT)

Session3:00-3:05pm

Welcome Remarks• J. C. Na, Chairman & CEO, KOFIA• Lyndon Chao, Managing Director, Head of Equities and Post Trade, ASIFMA

3:05-3:20pm

Macro outlook for Korean Economies• Jaechul Chang, Managing Director, Chief Economist, KB Securities, KB Financial Group

3:20-3:35pm

Korean Securities Market• Woochang Chung, Head of Global Equity Research Team, Mirae Asset Daewoo

3:35-3:50pm

Korean Bond Market• Myoungsil Kim, Head of Fixed Income Team, Research Center, Shinhan Investment Corp

3:50-4:35pm

Panel Discussion: Overseas Investors’ View on the Korean Market• Simon Williams, Managing Director, APAC Head of Equity Trading, BlackRock• Ross Whittaker, Managing Director, Co-Head of APAC Advanced Execution Services (AES) Electronic
Trading, Credit Suisse• Nicholas Peach, Managing Director, Head of Electronic Trading, Goldman Sachs• Lyndon Chao, Managing Director, Head of Equities and Post Trade, ASIFMA (moderator)

4:35-4:45pm

Q&A Session

2

Welcome Remarks:

J. C. Na
Chairman & CEO
KOFIA

3

Welcome Remarks:

Lyndon Chao
Managing Director, Head of Equities and Post Trade
ASIFMA

4

Macro Outlook for Korean Economies:

Jaechul Chang
Managing Director, Chief Economist
KB Securities, KB Financial Group5

Oct. 20202021 Korea Macro
Post-Corona Recovery, Returning to Potential
Jaechul Chang, Ph.D.
Chief Economist
KB Securities/KB Financial Group
02-6114-2924
jaechul.chang@kbfg.com

2020 corona crisis and 1H recession• The global economy fell into recession in the 1st half of 2020, followed by a better-than-expected recovery in 3Q 2020
- The recovery in 3Q was mostly driven by China and the U.S.
• The Korean economy also fell into recession in the 1st half, but the recovery may not be as strong as in China and the U.S.
- Korea is expected to record its third period of negative growth (-1.3%) since the BoK reported GDP data
• The BoK lowered its base rate to 0.5% and the government implemented four supplementary budgets (KRW61.7tn or ~3% of GDP)
- The BoK adopted an unlimited liquidity support facility and increased loans via CBBLF, BILSF, etc.

Corona crisis led global economy to recession in 1H(Q oQ % )G lobalA dvanced

Korean to record third period of negative growth since 1953

Em ergingK oreaP otentialG ro w th R ate

15
10
5
0
-5

C o ro na C risis

2nd O ilSho ck
A sian Financial C risis

Q1

Q2

Q3

Q4

2019
Source(s): CEIC, BoK, KB Securities forecasts
7

G ro w th R ate

(% )

10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0
Q1

Q2

Q 3F
2020

Q 4F

-10
1975

1980

1985

1990

Source(s): BoK, KB Securities estimates

1995

2000

2005

2010

2015 2020F

Recovery seems tepid with subdued inflation
Rapid recovery of industrial production recently slowed

No. of employed remains below level before Covid-19

A llindustry pro ductio n
M anufacturing & M ining Industry
Service Industry(M o M % )8.0
6.0

U nem plo yed (SA ,Left) (tho u)
1,400

27,4001,200(tho u)4.0

Em plo yed (SA )27,2002.0

1,000

27,0000.026,800800-2.026,600600

26,400-4.0

200

26,000-8.025,800

1

2

3

4

5

6

7

8

9 10 11 12 1

2

3

2019

4

5

6

7

8

2019

2020

Source(s): KOSIS, KB Securities

Headline CPI picked up (at 1%) while Core CPI remains subdued(% )0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9

2020

Source(s): KOSIS, KB Securities

2.0

400

26,200-6.0

Consumer and business sentiment remain weak(base=100 )110.0

C P I(Yo Y)

C P I(M o M )C o re-C P I (Yo Y)

C o re-C P I(M o M )

1.5

100.0

1.0

90.0

0.5

80.0

0.0

70.0

-0.5

60.0

C SI

B SI

50.0

-1.0
1

2

3

4

5

6

7

2019
Source(s): KOSIS, KB Securities
8

27,6008

9 1 0 11 12 1

2

3

4

5
202 0

6

7

8

9

1

2

3

4

5

6

7

2019
Source(s): BoK, KB Securities8

9 10 11 12 1

2

3

4

5
2020

6

7

8

9

Leading indicators hint at further recovery
Trade recovery on the way

Investment indicators show resiliency despite base effect(Yo Y % )10.0

Im po rts

(Yo Y % )30.0

Exports

5.0

TotalEquipm ent Index

Im ports o f C apitalG oo ds

20.0

0.0

10.0

-5.0

0.0

-10.0
-15.0

-10.0

-20.0

-20.0

-25.0

-30.0

-30.0
1

2

3

4

5

6

7

8

9 10 11 12 1

2

3

2019

4

5

6

7

1

3

4

5

6

7

8 9 10 11 12 1

2

3 4

5

6 7

8

9

2020

Source(s): KOSIS, KITA, KB Securities

Leading indicators of global economy also on uptrend
O EC DC ycle o f Leading C o m po site Index

102

2

2019

Leading indicators hint at further recovery

O EC D + M ajo r 6 N M E

101.00C ycle o f C o incident C om posite Index

101

100.00

100

99.00

99

98.00

98

97.00

97

96.00
95.00

96

94.00

95

93.00

94
1 2 3

4 5

6 7
2019

Source(s): KOSIS, KB Securities
9

-40.0

2020

Source(s): KITA, KB Securities(2 015=100)

88 9 10 11 12 1

2

3 4 5
2020

6 7 8

9

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9
2 019

2020

Source(s): OECD, KB Securities
Note: Six NMEs are China, Brazil, India, Indonesia, Russia Federation, South Africa

2021: Post corona recovery, economic growth at 2.7%
• Key assumptions:- The U.S.-China conflict will not escalate to become a meaningful shock to global trade and financial markets- The vaccine for Covid-19 will be distributed widely in 1H 2021 with no serious “knockdowns”• The economic growth rate will rebound to 2.7% from negative growth (-1.3%) in 2020
• Consumption and exports will likely lead the economic recovery- The recovery will continue in 2H but at a slower pace, alongside improvements in economic sentiments and global trade

Economic growth continues but at slower pace in 2H 2021
(% )

Q oQ

Time to recovery back to pre Covid-19 level

4
1.4

2

1.4

0.9

1.4

1
-1

-1.3

-2.7

1Q

-3.2
2Q

3Q E
2020

Source(s): BoK, KB Securities forecasts

GFCF

100

0.8

0.6
0.3

-1.7

A verage=1.4%

-4

105

95
90

-1.9

-3

10

2.5

0.4

0
-2

3.4

4.4

3

GDP
Private Consumption
GFCF(4Q 2019=100)
110

YoY

5

4Q E

GDP

85

A verage=0.8%
1Q

2Q

A verage=05% 3Q

2021 E

4Q

80

Exports
PrivateConsumption

4Q 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE
2019

2020

Source(s): BoK, KB Securities estimate

2021E

2022E

Gradual recovery amid low inflation, BoK will stay put• Private consumption will increase by 3.5% along with steady job growth despite less supports from government income transfers• Customs-based exports and imports to grow 7.3% and 7.0%, respectively, from -72% and -8.8% in 2020
- Sectors with good prospects: semiconductor, auto, and machinery, as well as those related to Covid-19 bio and medical products• Facilities investment is expect to grow by 6.3%, continuing two consecutive years of expansion along with a recovery in exports- The semiconductor sector seems to lead investments; the government’s digital and green “New Deal” will be another driver• Construction investment is likely to contract by 0.3% YoY because of sluggish commercial/industrial building construction- However, there is some upside potential coming from increased SOC budgets and expansion of New Deal’ related business• Job growth of 220,000 (vs. -217,000 in 2020) due to economic recovery and government’s safety net policy and New Deal
- Job growth will be driven by manufacturing as exports rebound• CPI inflation to rebound 1.0% (vs. 0.6% in 2020), below BoK target (2%)- Deflationary factors: Free education (high school), strong KRW, cuts to special consumption tax, public utility fees, etc.
- Inflationary factors: Increase in oil price (WTI USD50.00/bbl; 27.3%YoY), higher rents and base effects

11•

All of the above indicate that the economy will be in recovery mode, approaching potential levels gradually amid low inflation•

Therefor, the BoK is expected to hold the base rate at the current 0.5% level until the end of 2021

Recovery still needs boost from government spending• Government spending for stimulus measures is likely to shift to public investments from various transfer payments- Contribution of government spending to economic growth will remain at ~1.5%p• Fiscal multiplier may rise as government spending of resources may create large spillover effects- The government allocated KRW21.3tn in digital and green investments in 2021 out of total KRW160tn of 2020-25 “Korean New
Deal Project”• However, the 2021 budget is almost the same as in 2020 if four supplementary budgets are considered- Expect a supplementary budget in 2021 to add growth momentum if domestic demand remains weak
Government contribution to growth will remain at ~1.5%p in 2021
P rivate C o nsum ptio n
P rivate Investm ent
Invento ries

(Yo Y % p)

G o vt C onsum ptio n
G o vt Investm ent
N et expo rts

Government investment growth to be in double digits in 2021
(YoY % )G o vt Investm ent

30
24.6

4

-0.7

-6.3

-13.5

-0.6

1.5% pSource(s): BoK, KB Securities estimates

2021E

1.4% p2020E

1.6% p-20
20192021 E20182020 E20172019

Source(s): BoK, KB Securities estimates
12

2.2 2.6-102016

G o vt C o ntr.0.8% p

-4.8

11.1
7.1

-2.5

2015

-3
2018

0.4

0

-1.9
-0.2

5.2 6.8

4.1

2014

-2

11.6

10

1.7

2013

-1

0.8
-1.4

20

2012

-0.8

0.
0.41
1.0

0.3

2011

0

1.5

0.1
0.5
1.1

0.6
0.1
0.9

2010

1

0.3
0.1
0.8

1.0

2009

2

1.0

2008

3

Household debt stabilizes while public debt expands• Fiscal burden increases due to large fiscal demands: Covid-19 issues, “New Deals”, aging population, etc.
- Fiscal deficit of ~5% of GDP is expected to continue until 2024; and government debt to rise to 58% of GDP• Household debt (163% of GDP) is increasing, but at slower pace in 2Q 2020 (5.2% YoY) than 2010-19 average (7.7% YoY)
- Housing market regulations in July slowed debt growth, esp. mortgage loan growth, which slowed to 5.4% YoY in Aug (vs. 6.4% in
2Q)…however, other loans to households in Aug increased by 11% YoY via balloon effect- As the government is likely to hold its current policy stance on the housing market, household debt growth likely slow going
forwardGovernment growth contribution should remain at ~1.5%p in 2021
G o vt D ebt (R ight)(% o f G D P )Household debt growth rebounding but likely to slow

Fiscaldeficit (% o f G D P )

(% )

Q oQ

(% )
15

Yo Y

4.0

0

70

-1

60

-2

50

2.5

-3

40

2.0

3.5
3.0

12
9

1.5

-4

30

-5

20

-6

10

1.0

6

0.5
0.0

3

-0.5

-7

0
2018

2019

2020E

2021E

2022E

Source(s): Ministry of Economy and Finance, KB Securities
13

2023E

2024E

-1.0

0
2007

2009

2011

Source(s): BoK, KB Securities estimate

2013

2015

2017

2019

2021

Korea economic forecasts (2019-2022 )20192020 E202 1 E

2020 E2022 E% Q oQ

2021 E

1Q

2Q

-1.3

-3.2

3Q
1.4

4Q
1.4

1Q
0.9

2Q
0.8

3Q
0.3

4Q
0.6

GD P
% YoY

2.0

-1.3

2.7

2.4

1.4

-2.7

-1.9

-1.7

0.4

4.4

3.4

2.5

Private C onsum ption

% YoY

1.7

-3.9

3.5

2.0

-4.8

-4.0

-3.6

-3.2

4.5

3.7

3.4

2.6

C onstruction Investm ent

% YoY

-2.5

0.7

-0.3

0.5

4.2

-0.1

4.0

-4.1

-4.0

-1.5

1.4

2.2

Facilities Investm ent

% YoY

-7.5

2.6

6.3

5.1

7.3

4.1

1.4

-2.0

1.3

4.9

7.9

11.0

Exports (G & S)

% YoY

0.5

-4.8

5.0

3.0

6.3

-11.5

-7.7

-5.4

-3.4

15.6

6.0

3.2

Im ports (G & S)

% YoY

-0.8

-1.8

4.6

3.1

3.1

-4.8

-3.1

-2.3

1.2

7.6

5.3

4.5

C urrent A ccount Balance

U S$ bn

600

649

671

602

133

58

242

215

181

115

169

206

Exports (FoB)

% YoY

-10.4

-7.2

7.3

5.8

-1.8

-20.3

-3.2

-3.0

0.2

18.3

6.5

5.7

Im ports (C IF)

% YoY

-6.0

-8.8

7.0

5.3

-1.8

-16.1

-9.1

-8.1

-2.2

10.9

12.7

7.6

C PI

% YoY

0.4

0.6

1.0

1.3

1.2

-0.1

0.6

0.5

0.3

1.4

1.1

1.3

Policy Rate (BoK Base Rate)

% EoP

1.25

0.50

0.50

0.50

0.75

0.50

0.50

0.50

0.50

0.50

0.50

0.50

%

3.8

3.9

3.9

3.8

3.7

4.2

3.8

3.7

3.7

4.1

4.0

3.8

EoP

1156

1165

1130

1150

1217

1203

1170

1165

1175

1155

1145

1130

A vg

1165

1191

1158

1140

1194

1220

1187

1165

1175

1165

1150

1140

U nem ploym ent (SA )U SD /KRW

Source(s): BoK, KB Securities Forecast (10/21/2020)14

Disclaimer
This presentation is provided for information only and is not an offer or solicitation to trade in any security. Opinions in this report reflect the professional judgment of the research analyst(s) asof the date hereof and are based on information and data obtained from sources that KB Securities considers reliable. KB Securities makes no representation that the information and data are
accurate or complete and the views presented in this report are subject to change without prior notification. Clients should independently consider their own particular circumstances andobjectives and are solely responsible for their investment decisions and we shall not have liability for investments or results thereof. These materials are the copyright of KB Securities and may
not be reproduced, redistributed or modified without the prior consent of KB Securities. Comments and views in this report are of a general nature and intended for reference only and not
authorized for use for any other purpose.

Korean Securities Market:

Woochang Chung
Head of Global Equity Research Team
Mirae Asset Daewoo

16

Korean Equity Market
Issues and Strategy

Woochang Chung wcchung@miraeasset.com

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Contents
Korea Equity Market overview

2

Korea Equity Market issues

8

Changes in majority shareholder rule
Extended ban on short-selling
New BBIG Index launch
Liquidity

Korea Equity Market Strategy

12

21F Earnings recovery
21F Upward earnings revisions
Valuation

Top Picks

18 | Korean Equity Market Issues and Strategy

20

Mirae Asset Daewoo Research

Korea Equity Market Overview
Korea represents 1.5%of MSCI AC World• Korea ranks eleventh in MSCI AC World Index, representing 1.5% of Index value (as of Oct20)• In MSCI EM Index, Korea ranks third, with a 12.1% stake

S. Korea has 1.5% weight in MSCI AC World Index

S. Korea has 12.1% weight in MSCI EM Index
C ountry W eight(% ) in M S C I E M Index

C ountry w eight(% ) in M SC I A C W orld Index

O thers
20.0%

O thers
28.0%

C hina42.2%

B razil
4.6%

S . K orea
1.5%
C hina
5.3%
Japan
6.7%

Source: Factset, Mirae Asset Daewoo Research

19 | Korean Equity Market Issues and Strategy

U nited States
58.5%

India
8.3%

K orea12.1%

Taiw an
12.8%

Source: Factset, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research

Korea Equity Market Overview
Uphill battle• Due to slowing corporate earnings growth prospect, tighter regulations and aging demographics, Korea has lost its share in MSCI World
Index to 1.5% from its historical peak of 2.1%

Korea as a pct. of MSCI AC World Index(%)
Korea as a pct. Of MSCI ACWI

2.2

2.0

1.8

1.6

1.4

1.2

1.0
10

11

12

13

14

15

16

17

18

19

20

Source: Bloomberg, Mirae Asset Daewoo Research

20 | Korean Equity Market Issues and Strategy

Mirae Asset Daewoo Research

Korea Equity Market Overview : KOSPI sector allocations
Semicon: 27.6% of total
Index• Semicon represents the largest portion at 27.6% of total Index• Followed by healthcare (9.3%) and Software/Internet (8.6%) and Auto/Auto parts (6.9%)• Non-manufacturing has growing faster than manufacturing

KOSPI Sector weight by market cap.

KOSPI Market cap. Top 10

S em iconductors
27.6%

O thers
28.8%

B ank
3.9%
Trad./C ap.
G oods4.2%
C osm etics/A p
parel
C hem icals
4.3%
6.2%
note: 10/13 last priceSource: Quantiwise, Mirae Asset Daewoo Research

21 | Korean Equity Market Issues and Strategy

H ealthcare
9.3%

A uto.
6.9%

S oftw are
8.6%

R ank

C om pany

M arket cap.
(K R W tril.)

S ector1

Sam sung Electronics

363.6

Sem iconductors

2

SK H ynix

64.2

Sem iconductors

3

N A VER

48.5

Softw are4

Sam sun g B iolog ics

47.8

H ealth C are

5

L G C H EM .

45.5

C hem icals

6

H yu ndaiM otors

38.2

A utom obiles

7

C elltrion

36.5

H ealth C are

8

Kakao

32.8

Softw are9

Sam sung SD I

30.6

IT A ppliances

10

LG H & H

24.2

C o sm etics,A pparel,Toys

note: 10/13 last priceSource: Quantiwise, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research

Korea Equity Market Overview : investor breakdown
KOSPI: Foreign investor
holdings down to 34.5%• Foreign investors own 34.5% holdings in KOSPI (as of 14 October)

Accumulated net purchase amount by type of investors(K R W tril.)

Institutional Investors

Foreigners

Individuals

60

40

20

0

-20

-40

-60
10

11

12

13

14

15

16

17

18

19

20

Source: Quantiwise, Mirae Asset Daewoo Research

22 | Korean Equity Market Issues and Strategy

Mirae Asset Daewoo Research

Korea Equity Market Overview : investor breakdown
Retail buying: the main
drivers of KOSPI rerating
since early this year

• Since beginning this year, retail buying has been one of main drivers of KOSPI re-rating• Retail flow now accounts for over 80% of market turnoverDomestic stock trading share by Retail investors

Domestic stock trading share by Institutions & Foreign investors

85%

30%

Retail investors

80%

Institutions
Foreign investors

25%

75%

20%

70%
15%
65%
10%
60%
5%

55%

0%

50%
15.1

16.1

17.1

Source: Quantiwise, Mirae Asset Daewoo Research

23 | Korean Equity Market Issues and Strategy

18.1

19.1

20.1

15.1

16.1

17.1

18.1

19.1

20.1

Source: Quantiwise, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research

Korea Equity Market issues: 1. Changes in majority shareholder rule
Lower threshold forcapital gains taxes• Investors, including family members, which owns KRW300m+ in shares of any company, are liable for up to 33% of capital gains taxes from2021

• The threshold of KRW300m is significantly lower than what it is now at KRW1bn• High net-worth retail investors’ possible efforts to lower their holdings below the threshold could aggravate market volatility

Major Shareholder standard modification might trigger sell-off in Korean stock market

B eforeA fterM ajor Shareholder
D ate of R ecord

E nd of 2019

E nd of 2020

Transfer Tax A pplied D ate

2020.4.1~

2021.4.1~

M ajor Shareholder Standard(K O SP I)

O ver 1 B n K R W/ 1% per stock

O ver 300 M n K R W/ 1% per stock

M ajor Shareholder Standard(K O SD A Q )O ver 1 B n K R W/ 2% per stock

O ver 300 M n K R W/ 2% per stock

Source: dongA.com, Mirae Asset Daewoo Research

24 | Korean Equity Market Issues and Strategy

Mirae Asset Daewoo Research

Korea Equity Market issues: 2. Extended ban on short-selling
Extended ban on shortselling to March 2021

• The Financial Services Commission (FSC)’s temporary ban on short-selling activities of all listed Korean shares will be extended to March
2021, immediately after the current six-month restriction expires in September• After the initial temporary ban on short-selling, KOSPI has been up 37.7%

Remaining short-selling balance after banning short-selling(1m n short contracts)

KO SPI

450400

KO SD A Q

418
363

350
300
249

264

273

250
200

173

150
100
50
0
2020-01-02

2020-03-15

2020-08-05

Source: KRX, Mirae Asset Daewoo Research

25 | Korean Equity Market Issues and Strategy

Mirae Asset Daewoo Research

Korea Equity Market issues: 3. New BBIG Index launch
KRW launch of BBIG
indices and ETFs

• The Korean government announced plan to launch of ‘new deal’ investment funds and indices, which will be financed with KRW4tn fromstate-owned banks like KDB, KRW3tn from the government, and KRW13tn from the private sector• The KRX also launched five indices in BBIG (Battery, Bio, Internet, and Game), promoting these ‘new deal’ beneficiaries

K-New Deal Indexes outperformed KOSPI(2020.1.2=100)
200

KO SPIB B IG Index

180

S econdary B attery Index
B io Index

160

Internet Index
G am e Index

140
120
100
80
60
20.1

20.2

20.3

20.4

20.5

20.6

20.7

20.8

20.9

20.10

Source: KRX, Mirae Asset Daewoo Research

26 | Korean Equity Market Issues and Strategy

Mirae Asset Daewoo Research

Korea Equity Market issues: 4. Liquidity
Rise in credit loan andmargin debt: pressuring
on retail buying?

• KOSPI rally has been partly driven by retail buying, which is supported by credit loans• Credit loans (excluding house loan credits) have increased sharply for the past few months• Accordingly, the regulator has recently ordered banks to tighten credit loans• Brokerage firms have already started to tighten margin debts, which peaked in September at KRW17.9tn

Market cap turnover and margin debt as % of market cap
(%)
2.0

(%)
1.0

Margin debt as % of market cap (R)Turnover (L)

0.8

1.5

0.6
1.0
0.4
0.5

0.2

0.0

0.0
4/08

6/10

8/12

10/14

12/16

2/19

20.9

Source: KRX, Mirae Asset Daewoo Research

27 | Korean Equity Market Issues and Strategy

Mirae Asset Daewoo Research

Korea Equity Market Strategy: 2H20 Earnings recovery• 3Q/4Q operating profit consensus +18.7%/+52%YoY, 1st turnaround after 7 quarters of decline• Earnings turnaround led by Semi, 1M consensus revised up +2.5% in last 1M as Semi +6.8% revised up• We have already started to see strong 3Q so far, kicked off by better earnings from SEC, LGE and LG CHEM

Aggregated revenue growth in 2H20

Aggregated operating profit growth in 2H20(%YoY)(%YoY)

4

80

2.8

1.9
2
file:///V:\Global%20Consumer\금투협%20자료\명간이%20PPT%20실적
세미나_차트.티느 0.00국내기업실적 sheet: CELL D16
-0.8
-1.0
-2

2.4

40

-2.5

-4

59.2

60

27.2

20

-6

0

-8

-7.3

-20
-22.4

-12

28 | Korean Equity Market Issues and Strategy

-34.6

-28.1

-37.7

4Q20F

3Q20F

2Q20

1Q20

3Q19

4Q20F

-60
3Q20F

1Q20

4Q19

3Q19

2Q19

1Q19

Source: Quantiwise, Mirae Asset Daewoo Research

2Q20

-12.4

-14

-32.8

2Q19

-40

1Q19

-10

4Q19

Our Quant's key updatefor 3Q/4Q20 earnings

Source: Quantiwise, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research

Korea Equity Market Strategy : 2H20 Upward earnings revision
Upward earnings
revision on the way• Aggregated 3Q20 OP consensus has been up 3.6% for past one month• Semicon has highest upward revisions at 7% vs non-semicon’s 2%• Among non-semicon, display, brokerage, steels and healthcare see decent upward revisions

3Q20 OP consensus revision trend(20.1=100)

PPT 39페이지• 유명간
110
3Q20F OP consensus

semiconnon-semicon

105
100
95
90
85
80
75
70
20.1 20.1 20.2 20.2 20.3 20.3 20.3 20.4 20.4 20.5 20.5 20.6 20.6 20.7 20.7 20.8 20.8 20.8 20.9 20.9 20.10
Source: KRX, Mirae Asset Daewoo Research

29 | Korean Equity Market Issues and Strategy

Mirae Asset Daewoo Research

Korea Equity Market Strategy: 21F Earnings recovery
21F operating profit
growth +38.6%YoY• For investors looking at next year, there will be a low base effect that’s favorable in 1H. Along with a low base, eyes on recovery of Semi sector• Consensus currently looks for 4Q to be bottom while seeing recovery from 1Q21. Semi export have been somewhat indicative of this as
Aug/Sept Semi export have showing strong YoY growth albeit some of that from Huawei’s pull-in demand

Aggregated revenue growth in FY21

Aggregated operating profit growth in FY21(%YoY)(%YoY)

12

60
10.7

file:///V:\Global%20Consumer\금투협%20자료\명간이%20PPT%20실적
10세미나_차트.티느

9.6

8

국내기업실적 sheet: CELL i3

6.0

6

20

14.7

14.9
7.0

4

1.2
1.9

1.5

2

0
0.7

-5.1

0
-0.6

-2

-3.2
12

13

14

15

Source: Quantiwise, Mirae Asset Daewoo Research

-5.0

-4.1

-20

-0.4

-4

30 | Korean Equity Market Issues and Strategy

36.8

file:///V:\Global%20Consumer\금투협%20자료\명간이%20PPT%20실적세미나_차트.티느
29.1

40

7.6
국내기업실적 sheet: CELL D3

16

17

18

19

20F

-33.0

-40
21F

12

13

14

15

16

17

18

19

20F

21F

Source: Quantiwise, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research

Korea Equity Market Strategy : 21F Upward earnings revisions
Upward earnings
revision on the way• Aggregated FY21 OP consensus has risen 2.0% for one month (Semicon: 3.3%, non-semicon: 1%)• We expect accelerating momentum in upward earnings revisions in chemicals, healthcare, auto, semicon sectors

FY21 OP consensus revision trend(20.1=100)

PPT 40페이지• 유명간
1102021F OP consensus trend

semiconnon-semicon

105
100
95
90
85
80
75
70
20.1 20.1 20.2 20.2 20.3 20.3 20.3 20.4 20.4 20.5 20.5 20.6 20.6 20.7 20.7 20.8 20.8 20.8 20.9 20.9 20.10
Source: Quantiwise, Mirae Asset Daewoo Research

31 | Korean Equity Market Issues and Strategy

Mirae Asset Daewoo Research

Korea Equity Market Strategy: Valuation
Valuation: still not as
demanding as it looks• 12M forward P/E for KOSPI has reached 12x (vs historical average of 10x since 2010), trading at above +2 STD• However, adjusting for historical risk free rate, current 12M forward P/E would still trade at a discount to its historical average of 13.7x

KOSPI 12F PER (unadjusted)

KOSPI 12F PER (risk free rate adjusted)

(x)

(P)
12MF PER (L)

16

KOSPI (R)

3,000

(x)
20

Risk-free rate adjusted 12MF PER (L)

(P)
3,000

KOSPI (R)

18
14
16
12

2,500

10

2,500
14
12

8

2,000

10

2,000

8

6

6
4

1,500

2

2

0

1,000
10

11

12

13

14

15

Source: Bloomberg, Mirae Asset Daewoo Research

32 | Korean Equity Market Issues and Strategy

1,500
4

16

17

18

19

20

0

1,000
10

11

12

13

14

15

16

17

18

19

20

Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research

Korea Equity Market Strategy: KOSPI valuation
KOSPI ERP interest rate trend(%)
6

KOSPI Equity Risk Premium (3-stage DDM)

Korea Government Bonds 10YR yield5

file:///V:\Global%20Consumer\금투협%20자료\ERP%20차트.xlsm

4

CELL AL44

3
2
1
0
10

11

12

13

14

15

16

17

18

19

20
(x)

(P)
KOSPI (L)

3,000

12MF PER (R)Risk-free rate adjusted PER (R)

20
18
16
14

2,000

12
10
8
1,000

6
4
2

0

0
10

11

12

13

14

15

16

17

18

19

20

Source: Quantiwise, Mirae Asset Daewoo Research

33 | Korean Equity Market Issues and Strategy

Mirae Asset Daewoo Research

Korea Equity Market Strategy: S&P valuation• Growing concerns over S&P500’s demanding valuation. 12MF P/E is trading at 20x (vs. historical average of 17x)
• But, reflecting recent lower interest rates, 12MF P/E would trade still slightly below historical average

S&P 500 12MF PER (unadjusted)(x)
25

12MF PER (L)S&P 500 12MF PER (risk free rate adjusted)
(P)
4,000

S&P500 (R)

(P)

(x)
35

Risk-free rate adjusted 12MF PER (L)

4,000

S&P500 (R)

30
20
3,000

15

3,000

25
20

2,000

2,000
15
10
10

1,000

1,000
5

5

0

0
10

11

12

13

14

15

Source: Bloomberg, Mirae Asset Daewoo Research

34 | Korean Equity Market Issues and Strategy

16

17

18

19

20

0

0
10

11

12

13

14

15

16

17

18

19

20

Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research

Korea Equity Market Strategy : S&P valuation
S&P500 ERP interest rate trend(%)
6

S&P500 Equity Risk Premium (3-stage DDM)

US 10-yr treasury rate5

file:///V:\Global%20Consumer\금투협%20자료\ERP%20차트.xlsm

4

CELL AL2

3
2
1
0
10

11

12

13

14

15

16

17

18

19

20
(x)

(P)
S&P500 (L)

4,000

12MF PER (R)Risk-free rate adjusted PER (R)35• 유명간 PPT 17페이지

30

3,000

25
20

2,000
15
10

1,000

5
0

0
10

11

12

13

14

15

16

17

18

19

20

Source: Quantiwise, Mirae Asset Daewoo Research

35 | Korean Equity Market Issues and Strategy

Mirae Asset Daewoo Research

Korean Bond Market :Myoungsil Kim
Head of Fixed Income Team, Research Center
Shinhan Investment Corp

36

Domestic bond market outlook
Suspicious numbers[ Research Center ] MyoungSil Kim☎ 02-3772-2193
 msbond@shinhan.com

Contents
I.

Intro

3

II.

Monetary policy & demand

6

III.

2021 issue checklist

13

IV.

Investment strategy

18

I. Intro
History-making moments of 2020

I. Intro: Domestic bond market trend 2020 (1)Bond market hit by COVID-19-sparked economic shock but stabilized on policy response With COVID-19 spreading globally from February, the Korean government and Bank of Korea (BOK) have taken all-out measures toprotect the real economy and stabilize the financial markets.
 Monetary easing drove down market rates to record-low levels at end-July, but bond market volatility rose again from September
due to increased supply and weak US Treasuries.
 3Y and 10Y KTB yields have fallen by 45.8bp and 16bp YTD, respectively, leading to a roughly 30bp rise in 3Y/10Y spread to 62bp.
Base rate and KTB yields

Source: Yonhap Infomax, Shinhan Investment Corp.

3Y/10Y and 10Y/30Y KTB spreads

Source: Yonhap Infomax, Shinhan Investment Corp.

I 40

I. Intro: Domestic bond market trend 2020 (2)YoY drop in annual bond return on greater volatility
 Domestic bonds should continue to post a positive annual return at 2.2% for 2020, though down 1.4%p vs. 2019’s 3.6%.
 Bond returns are buoyed by: 1) base rate cuts; 2) BOK’s outright purchase of KTBs; and 3) rising concerns over economic slump.
 But the upside should be limited due to unfavorable supply/demand conditions (largest-ever KTB issuance in 2020, etc.).

YoY change in base rate and market rates

Source: Yonhap Infomax, Shinhan Investment Corp. / Note: MSB = monetary stabilization bonds

KRX Bond Index (Total Return Index)

Source: Yonhap Infomax, Shinhan Investment Corp.

I 41

II. Monetary policy & demandTime to take supplementary measures

II. Monetary policy: Rate freeze in 2021
Base rate likely to be kept low under the Korean New Deal initiative The 2020-2024 fiscal management plan points towards fiscal expansion to provide a potent stimulus for the economy.
 Government expenditure is projected to grow at a CAGR of 5.7% in 2020-2024, while revenue should increase only 3.5% per annum.
→ Need to secure a stable ﬂow of ﬁscal funds
 The BOK faces growing calls to play a supportive role in fiscal expansion. → Base rate likely to be kept low for a long me
Korean New Deal: Project costs by focus area

Source: Ministry of Economy and Finance, Shinhan Investment Corp.

Korean New Deal: 2021 budget allocation by focus area

Source: Ministry of Economy and Finance, Shinhan Investment Corp.

I 43

II. Monetary policy: Gov’t-BOK cooperation
Close cooperation between government and BOK required for fiscal expansion
 A stable flow of fiscal funds is needed, but additional issuance of debt is a burden for both the government and the bond market.
 The BOK needs to build trust in financial markets to reduce the burden from any additional debt issuance (hints at mid-term KTB
market intervention, etc.).
 It may pledge to supplement its existing asset purchase plan and provide forward guidance of low rates for the long term.
Shift in monetary easing paradigm

Bailout
Helicopter money

Modern Monetary
Theory (MMT)• Zero rate
• Negative rate
• QE + QQE(rate control policy)• Purchase of junkcorporate bonds• Purchase of Treasury
bondsin primary market⇒ Mixed use of monetaryand fiscal policies in earlystage⇒ Central bank and gov’t
help to protect private
assets against possible
losses⇒ Central bank directly
provides funds to gov’t• Unlimited fiscal
expansion• Direct liquidity
injection into private
sector• Permanent bailout,
nationalization ofbanking system

Policy mix

Source: Shinhan Investment Corp.

⇒ Gov’t and central
bank acting as one

BOK: Conventional/unconventional monetary measures expected in 2021

Step 1• Additional base rate cut (from current 0.50%): Only if the US Fed adopts negative interest rate policy

Step 2• Expansion of monetary easing: BOK purchased KRW8tr worth of KTBs YTD. It has hinted atadditional purchase in case of increase in market volatility, butmore details (scale/timing of purchase, etc.) need to be released.

Step 3• Yield curve control (YCC): Limited possibility• Purchase of KTBs in primary market: Limited possibility

Source: Shinhan Investment Corp.

I 44

II. Monetary policy: Review on outright purchase
Review on BOK’s outright purchase program in 2020 The BOK has mostly purchased non-benchmark 10Y KTBs under its outright purchase program, with benchmark KTBs accounting fora mere 2.1%. → Limited impact on the market
 The BOK’s market intervention seems insufficient with KRW8tr worth of KTBs purchased YTD, given that actual KTB issuance in 2020
will likely exceed the originally planned amount by KRW44.6tr due to massive supplementary budgets.
BOK’s YTD outright purchase of KTBs by maturity

Nonbenchmark

BenchmarkMaturity

Amount(100mn KRW)

Share (%)

3Y

5,200

6.5

5Y

8,800

11.0

10Y

52,300

65.4

20Y

12,000

15.0

5Y

1,700

2.1

Source: Yonhap Infomax, Shinhan Investment Corp.

2020 KTB issuance: Original plan vs. actual issuance (estimate)

Source: Bank of Korea, Shinhan Investment Corp.

I 45

II. Monetary policy: Supplementary measures
BOK to supplement outright purchase program in 2021
 The portion of benchmark KTBs needs to be raised to make a bigger impact on the market.
 The BOK needs to expand the share of long-term/ultra-long-term KTB purchases to make up for the void in demand fromlong-term/ultra-long-term institutional investors.
 More details (purchase criteria, scale, timing) should be released through communication channels such as Monetary Policy Board
meetings. → Forward guidance in a broad sense
BOK’s KTB holdings and share in outstanding balance

2019-2020 KTB issue share by maturity (target/actual)(%)

Short-term

Mid-term

Long-term(3∙5Y)(10Y)(20∙30∙50Y)

2019

Target(actual)40±5 (38.4)

25±5 (25.7)

35±5 (35.9)

2020

Target

40±5

25±5

35+5

* Long-term KTB target is set at or above the middle of the target band (35%) considering
excess demand.
Source: Bank of Korea, Shinhan Investment Corp.

Source: Ministry of Economy and Finance, Shinhan Investment Corp.

I 46

II. Demand: Foreign investors
Foreign demand to remain solid on favorable market conditions
 The balance of KRW-denominated bonds held by foreigners hit an all-time high of KRW150.9tr in August, in contrast to what we
witnessed during the global financial crisis in 2008.
 We note that foreign investors expanded purchase of long-term KTBs, with cumulative net buying of 10Y KTBs reaching KRW8.3tr vs.
KRW5.9tr for 5Y and KRW3.7tr for 3Y.
 Foreign demand for KRW-denominated bonds should remain solid, given: 1) attractive absolute yield; 2) positive foreign exchange
hedging premium; 3) low credit default swap (CDS) risk premium and stable foreign exchange rates.
Balance and duration of foreign bond holdings

Source: Yonhap Infomax, Shinhan Investment Corp.

Foreign net buying of KTBs/MSBs and 10Y government bond yields

Source: Yonhap Infomax, Shinhan Investment Corp.

I 47

II. Demand: Insurers
Demand from insurers remaining steady, but…
 Demand from insurers has been steadier than expected in 2020, with the monthly average net buying of KTBs by insurers up by
KRW1.3tr YoY at KRW3.2tr for the year.
 Regulatory changes will raise the cap on foreign currency assets for insurers from late 2020, but impact will likely be limited due tothe unfavorable climate for overseas investment such as the rise in hedging costs.
 Asset growth at insurers has been on a steady downtrend with the growth rate dropping to 3% levels for life insurers and to 4%
levels for non-life insurers in 2020.
Net buying of KTBs by insurers

Source: Yonhap Infomax, Shinhan Investment Corp.

Asset growth at life vs. non-life insurers

Source: Korea Life Insurance Association, General Insurance Association of Korea, Shinhan Investment Corp.

I 48

III. 2021 issue checklist
FX trend/inflation/spread/long-term KTB issuanceIII. 2021 issue checklist① Weaker USD/stronger KRW trend to continue Weaker USD/stronger KRW trend will likely continue, with the USD/KRW rate expected to average around KRW1,100 in 2021.
 FX trends favorable for foreign investment in KRW-denominated bonds, but unfavorable for domestic insurer investment inoverseas bonds.
 Likely to offset impact of slower asset growth at insurers and increased cap on foreign currency assets→ Posi ve for bond supply and demand condi ons
Foreign investment in KRW-denominated bonds and 1Y FX swap rate

Key points of the revised Insurance Business Act
Progress

Passed the National Assembly on April 29, 2020
Cap on foreign currency assets raised from 30% to 50%
for general accounts and from 20% to 50% for special
accounts to grant more autonomy in asset management

Key changes

Insurers required to provide a pre-contractual info
package in addition to documents on insurance policies
to ensure adequate understanding by consumers
Fines for failing to notify consumers the right to request
interest rate cuts will be imposed on the insurancecompany instead of board members

Implementation Slated to go into effect six months from promulgation
Source: Yonhap Infomax, Shinhan Investment Corp.

Source: Shinhan Investment Corp.

I 50

III. 2021 issue checklist② Inflation/deflation
 Global central banks turning increasingly tolerant to higher inflation over the longer run(e.g., US Fed’s Average Inflation Targeting, ECB’s consideration of inflation overshooting) In Korea, inflation expectations are low with prices temporarily rebounding on seasonality but long-term factors (prices ofoil/transporta on/educa on and policy factors) poin ng to a downtrend → price indexes linked to policy support expected to fall
 Steadier food prices to limit addi onal upturn → Need time for CPI to point toward recovery in consumption and investment
Average MoM changes in CPI since 2012

Source: Bank of Korea, Shinhan Investment Corp.

3-month average changes in CPI by expenditure category

Source: Bank of Korea, Shinhan Investment Corp.

I 51

III. 2021 issue checklist③ 2021F 3Y/10Y KTB spread

Economic trajectory based on short/long-term and credit spreads

 3Y/10Y KTB spreads are closely related to economic conditions,which rapidly transitioned from a late expansion phase in 2019 toan early recovery phase in 2020 due to the COVID-19 pandemic.
 Short/long-term spreads will recover to reasonable levels upon
the return to the economic trajectory of 2018-2019, between alate expansion phase and recession.
Base rate and 3Y/10Y KTB spread by quarter

Source: Yonhap Infomax, Shinhan Investment Corp.

Source: Shinhan Investment Corp.

I 52

III. 2021 issue checklist④ KTB issuance scenario based on 2020-2024 fiscal plans KTB issuance notably increased in 2020 after remaining under KRW100tr per year through 2018-2019.
 Expansionary fiscal efforts such as the Korean New Deal are expected to be funded mainly by the issuance of deficit-financing KTBs.
 KTB issuance in 2020-2025 will likely exceed KRW160tr per year. Primary market shock is expected to lead to long-term impact on thebond market as a whole.
KTB issuance assuming government spending is
100% funded by deficit-financing KTBs

Source: Ministry of Economy and Finance, Shinhan Investment Corp.

KTB issuance assuming government spending is
50% funded by deficit-financing KTBs

Source: Ministry of Economy and Finance, Shinhan Investment Corp.

I 53

IV. Investment strategy
Another open ending for monetary policies in 2021

IV. Investment strategy① Fiscal expansion, ② KTB issuance risks followed by ③ BOK’s KTB purchases, ④ debt fatigue
 Long-term default risks presented by expansionary fiscal policies and increased issuance of KTBs expected to be priced into yields to acertain extent.
 After a time gap, Bank of Korea’s KTB purchases should help to offset the supply burden in the market.
Debt fatigue will likely set in, slowing down the pace of economic recovery as a result.
 Risk exposure seen inevitable through late-2020 to 1Q21 with base effect to add to the burden.
However, yields should stabilize downward on closer cooperation between the government and central bank.
Medium-term fiscal spending plan

Source: Ministry of Economy and Finance, Shinhan Investment Corp.
Note: Based on 3rd supplementary budget; 4th supplementary budget to push up 2020 total to KRW554.7tr

Fiscal balance and national debt since 2020

Source: Ministry of Economy and Finance, Shinhan Investment Corp.

I 55

IV. Investment strategy
2021 bond market outlook – basic factors

2021 bond market outlook – additional factors
Impact on
yieldsEconomic growth① 3.1%② QoQ growth compared with 2019

1.20%

Inflation① 1.5%② Expected to fall short of target③ Limited impact on yields

0.00%

Monetary policy① Base rate to remain unchanged② KTB purchases to continue

0.50%(0.25)%

Basic
factors

Directionof yields

Additional
factors

1.45%
Source: Shinhan Investment Corp.

Fiscal policy① Expansionary fiscal policy② Coordination with monetary policy needed

NeutralBond issuance① KTB issuance: KRW172.9tr② Municipal bond issuance: Around KRW6tr

Increase

Bond demand① Increase in BOK’s KTB purchases② Insurer net buying to decline

Decrease

FX trend① Weaker USD/stronger KRW② Foreigner net buying to continue

Decrease

Source: Shinhan Investment Corp.

2019

2020

2021

(%)

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Base rate (term-end)

1.75

1.75

1.50

1.25

0.75

0.50

0.50

0.50

0.50

0.50

0.50

0.50

3Y KTB (average)

1.798

1.641

1.278

1.411

1.233

0.914

0.853

0.85

0.90

0.80

0.70

0.70

5Y KTB (average)

1.861

1.677

1.325

1.505

1.365

1.170

1.125

1.20

1.25

1.10

1.00

1.00

10Y KTB (average)

1.977

1.785

1.395

1.660

1.560

1.429

1.409

1.50

1.55

1.40

1.30

1.30

30Y KTB (average)

2.008

1.814

1.382

1.613

1.584

1.575

1.587

1.60

1.65

1.50

1.40

1.40

I 56

Panel Discussion: Overseas Investors’ View on the Korean Market

Simon Williams
Managing Director,
APAC Head of Equity
Trading
BlackRockRoss Whittaker
Managing Director,
Co-Head of APAC
Advanced Execution
Services (AES)Electronic Trading
Credit Suisse

Nicholas PeachManaging Director,
Head of Electronic
Trading
Goldman Sachs

Lyndon Chao
Managing Director,
Head of Equities
and Post Trade
ASIFMA(moderator)

57

Thank you for attending!
We hope to see you at our next event:ASIFMA Virtual Event:
ESG and Sustainable Finance in Asia: the Fintech and Data Challenge(in collaboration with the Future of Sustainable Data Alliance)
Wednesday, 28 October 2020
4:00PM – 5:30PM (HKT/SIN)
www.asifma.org/events58

Speakers:

Ramesh Subramaniam
Asian Development Bank

Gabriel Wilson-Otto
BNP Paribas AssetManagement

Kamran Khan
Deutsche Bank

Eugène Goyne
EY

Helene Li
Fintech Association ofHong Kong; GoImpact

Julia Walker
Refinitiv

Matthew Chan
ASIFMAwww.asifma.org/events

Helena Fung
FTSE Russell

59