Korea Korea Strategy – Time to rotate to cyclicals

We believe the next leg-up will be driven by beaten-down cyclicals as the focus shifts to 2021 EPS growth. Cyclicals are well placed with non-tech cyclical EPS growth likely to outperform defensive after materially underperforming in 2020.

27 May 2020

Public Transportation also became more crowded

Source: UBS Evidence Lab

This line charts shows cyclicals and defensive performance during previous crises in 2009, 2010, 2016, and 2020.

What will drive the next leg of the recovery?

Driven by tech, healthcare and internet, KOSPI has rallied to -10% YTD after a sharp fall previously. We believe the next leg-up will be driven by beaten-down cyclicals as the focus shifts to 2021 EPS growth. Slowing EPS cuts are positive as well. Uncertainty over the shape of the recovery, geopolitics, weak Q220 outlook and potential downgrades to guidance are overhangs. But we see limited risk to KOSPI, especially for cyclicals.

Focus to shift to 2021 EPS growth as we enter H220

Our view on a weak Q220 is well known but H220 guidance could disappoint as the pace of recovery is uncertain as economies reopen. In H220, we believe market focus will shift to 2021 EPS. We think cyclicals are well placed with non-tech cyclical EPS growth likely to outperform defensive after materially underperforming in 2020.

Cyclicals likely to drive the next phase of the recovery

We are positive on cyclicals as very little expectation on recovery is priced in despite economies re-opening from lockdown.

Will foreign flows improve?

We feel retail investors raising KOSPI YTD is a burden. But foreign outflows have slowed sharply and recently reversed, which we view as positive.

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