A Semiconductor-Led Market Rebound: What Could Drive Further Gains?

The market has recently surged, led by the semiconductor sector. This is the combined result of SK Hynix's decision to acquire and cancel shares worth 40 trillion won and the U.S. Treasury's expanded bond buyback, which helped stabilize rates. Lee Kyung-min explained, "You can think of it as the crash caused by semiconductors having turned into a rally driven by semiconductors," adding that sectors beyond chips, including biotech, AI infrastructure, and nuclear power, are rising together.

The main cause of the spike in U.S. long-term rates was supply-demand and sentiment factors in the 10-year and 30-year maturities, not the 2-year. The U.S. Treasury's bond buyback is viewed positively as a signaling effect that puts out the fire of the rate surge. However, Lee Kyung-min said, "The root cause hasn't really been solved. I think the picture where the Treasury steps in aggressively and puts out the fire to some extent is accurate," and stressed that solving the rate problem at its root requires easing the Iran war and a drop in oil prices.

Lee Kyung-min said, "As bond yields fell, crypto, which is the most sensitive to liquidity among risk assets, surged, and you can evaluate it that way," explaining that the crypto market reacts sensitively to changes in rates.

Lee Kyung-min said, "What decision comes out of the mid-September event will determine whether this trend continues or ends as a one-off, or whether disappointment sets in again because the bill fails to pass," pointing to the bill's fate as a key variable that will determine the sustainability of the crypto market's movement.

Shareholder-return policies at semiconductor companies can be rated positively at around 7 to 8 points. However, Lee Kyung-min said, "If you look at it in terms of scores, you could give 7 or 8 points. But the key point is whether shareholder-return policy determines the market trend, and it doesn't," drawing a line that shareholder-return policy is not the core factor determining the market's direction.

The semiconductor sell-off in July was mainly driven by disappointment over shareholder-return policies. Valuations at both Samsung Electronics and SK Hynix have fallen to around 4x or below, reaching historical lows. Lee Kyung-min said, "Valuations are too cheap now. Both Samsung and SK Hynix have fallen to around 4x, even below 4x in some cases, so in this situation, stronger shareholder-return policies can provide enough force to normalize valuations," predicting that strengthened shareholder-friendly policies will drive a return to normal valuations.

The strengthening of shareholder-friendly policies at semiconductor companies is read as a sign that management is confident in the sustainability of the chip cycle. In particular, SK Hynix has set aside a record 40 trillion won for shareholder returns and pledged to return more than 50% of free cash flow (FCF), a higher standard than its previous benchmark. Lee Kyung-min said, "Management has some confidence in the sustainability of this chip cycle, which is why they set aside a record 40 trillion won and raised the bar above the prior 50%-plus free cash flow standard, putting shareholder-friendly policy at the forefront," analyzing that this signals companies view the industry outlook positively.

One obstacle to Samsung Electronics' share price gains has been losses in its foundry division. Recently, however, the picture is changing as foundry prices have been raised and order momentum has turned positive. Lee Kyung-min said, "The foundry price increases are meaningful, and I view order momentum as a positive variable as well. If third-quarter results confirm a real swing to profitability, that could become another step-up momentum," diagnosing that whether the third-quarter results show a return to profit will be the key to Samsung's share price moving higher.

Expectations for semiconductor earnings in the third and fourth quarters are currently not high. Lee Kyung-min said, "Right now, expectations for third- and fourth-quarter results aren't high. Put the other way around, if new momentum comes in and results come out better than expected, that would be a variable that raises the upside," explaining that low expectations can actually act as a strong stock-price driver if results beat forecasts. Strengthened shareholder-return policies and tailwinds in the foundry business are expected to play a role in driving that upside.

Nvidia's earnings release is an important event that will significantly affect the global chip market. Lee Kyung-min said, "I think it matters whether they give guidance and whether they beat the current market consensus. Nvidia's share price has recovered quite a bit. If the picture emerges where it moves past its prior all-time high, that could be a tailwind for global chipmakers overall," stressing that Nvidia's guidance and whether it beats market consensus are what count. He added that if Nvidia's share price breaks its historical high, it would act as a positive catalyst across the global semiconductor sector, and that the market's reaction to controversy over next-generation product specifications should also be watched.

Semiconductor trade data is an important gauge of industry conditions. Looking only at August 1 to 10 ahead of the September 1 trade data release, average daily semiconductor export value rose from July. Lee Kyung-min said, "Even looking only at data through the 11th, which will be released on September 1, average daily semiconductor export value rose versus July. Looking at it that way, it's not bad. Chip prices have also risen, and contract prices have been revised upward, so you can see these positive variables accumulating," presenting an optimistic outlook for the industry based on rising chip prices, upward-revised contract prices, and other accumulating positives.

The won-dollar exchange rate fell more than 10% within a month from the 1560 range, showing sharp volatility. Lee Kyung-min said, "As the won-dollar rate fell sharply from its peak, foreign selling began to ease, and as it dropped further below 1400, foreign buying came in," analyzing that foreign investor flows have a bigger impact on the market than currency effects. This is because foreign flows are leading the market while individual and institutional trading has shrunk.

Lee Kyung-min said, "Even if there is some undershooting, I think it will be more likely to keep moving in the mid-to-high 1300s and early 1400s rather than settle below 1400," forecasting a stable range rather than a sharp decline.

Interest in the pharmaceutical and biotech sector has risen alongside the recent Moderna Phase 3 news. However, Lee Kyung-min said, "Moderna's Phase 3 news is obviously very positive. But chasing a broad pharma-biotech rally without knowing the detailed content is somewhat risky," advising against a blanket approach given the wide dispersion between individual stocks and avoiding chasing purchases that ride short-term news. He analyzed that stabilization in bond yields would be the real trigger for a substantive rebound in pharma and biotech.

While semiconductors anchor the market, he presented a three-pronged portfolio as a plus-alpha strategy for additional returns. Lee Kyung-min said, "Semiconductors will hold the center to some degree. For a plus-alpha strategy, what should you look at? Insurance stocks, semiconductors plus oversold-versus-earnings names, and some beneficiaries of falling rates, if you combine these," recommending that investors keep a semiconductor-centered portfolio while also considering sectors that have fallen too far relative to earnings (IT, automotive, defense, shipbuilding, secondary batteries) and sectors that benefit from lower rates (insurance, banks, retail distribution).

Lee Kyung-min offered a positive outlook for the market for the rest of the year. He said, "As a first step, I see the market at around 2850, and an attempt to break the prior all-time high this year is possible. So within this portfolio, if you adjust your weightings well according to market conditions," presenting 2850 as the first target and seeing a possible attempt to break the prior peak this year. He stressed that adjusting weightings according to market conditions is important when executing the proposed portfolio strategy.