Semiconductors drive Kospi earnings upgrades, but July rebalancing poses test

Earnings expectations for the Kospi in the second half of the year are rising quickly, but the bulk of the upgrades remain concentrated in the electrical and electronics sector. As large-cap semiconductor stocks drive index earnings momentum, the key question for further upside is whether gains will spread to non-semiconductor sectors such as financials and retail from the fourth quarter onward. The National Pension Service's rebalancing and continued foreign selling have also emerged as supply-side headwinds for the market in July.

According to FnGuide, a financial data provider, the consensus for Kospi operating profit in the third quarter rose 4.99 percent over the past month to 269.41 trillion won ($173 billion). Over the same period, the consensus for the electrical and electronics sector climbed 6.68 percent to 193.28 trillion won, outpacing the broader index's rate of upgrade.

The bulk of the earnings upgrades over the past month were also concentrated in electrical and electronics. The third-quarter Kospi operating profit consensus is estimated to have risen by about 12.8 trillion won from a month earlier, with the electrical and electronics sector accounting for 94.5 percent of that increase, or roughly 12.1 trillion won. In the fourth quarter, the sector's share was even higher — at 95.9 percent, or about 16.8 trillion won — of the roughly 17.5 trillion won total upgrade.

The broadening of earnings gains to non-semiconductor sectors remains at an early stage. In the third quarter, operating profit consensus was revised upward over the past month in transportation and warehousing (up 2.71 percent), securities (1.45 percent), medical and precision equipment (1.17 percent), retail (0.49 percent) and chemicals (0.42 percent). The number of sectors receiving upgrades widened in the fourth quarter to include entertainment and culture (1.82 percent), construction (1.60 percent), securities (1.44 percent), insurance (0.94 percent) and retail (0.59 percent), but the electrical and electronics sector still dominates in absolute earnings terms. Meanwhile, second-half consensus estimates for utilities, metals, and machinery and equipment were revised downward over the past month.

Yang Il-woo, head of the global investment strategy team at Samsung Securities, said the current operating profit consensus for the semiconductor sector is achievable even if semiconductor prices barely rise throughout the second half, and that further upward revisions to semiconductor earnings estimates are likely. "Through the third quarter, AI value-chain-related sectors including semiconductors should continue to outperform, and by the fourth quarter the recovery could extend to domestic demand sectors as well," he said. He also forecast that earnings momentum in the securities sector would strengthen in the third quarter, with banks picking up the baton from the fourth quarter onward.

Before the third-quarter Kospi trend can take shape, the market must first work through rebalancing pressures. Domestically, the National Pension Service faces pressure to trim its equity allocation, while globally, foreign selling tied to fund rebalancing is intensifying — both factors are seen as capping the Kospi's upside in July.

National Pension Service rebalancing is the central supply-side variable for the Kospi in July. A sharp near-term surge in the index has amplified pressure on the pension fund to adjust its domestic equity weighting, and concerns are growing that institutional selling could compound the supply burden.

According to industry estimates, the National Pension Service's domestic equity allocation stood at 21 percent at the end of March but is estimated to have climbed to about 30.8 percent as of June 25's closing price, reflecting the domestic market's rally. Taking into account the fund's strategic and tactical asset allocation discretion, the domestic equity weighting could be as high as 29.8 percent, suggesting the fund may need to trim its equity exposure by roughly 1 percentage point by year-end.

The National Pension Service has pushed back against fears of large-scale selling. Kim Seong-ju, chairman of the National Pension Service, said Tuesday on his social media account that "74 trillion won is a figure I have no idea how anyone calculated — it is an absurd number," adding that there is no chance the fund's rebalancing will turn into a "selling bomb."

As for the foreign selling pressure that has built up during the global rebalancing process, analysts expect the intensity to ease gradually as end-of-quarter rebalancing-driven selling winds down.

Kim Yong-gu, a researcher at Yuanta Securities Korea, said that with second-quarter rebalancing having wrapped up as of last week, "mechanical supply distortions and the volatility linked to them are expected to gradually subside, with the market normalizing around genuine demand." Kim added that "excessive volatility in the domestic market is largely tied to global rebalancing flows."

Jeong Hui-chan, a researcher at Samsung Futures, said that despite record-level net foreign selling, "the negative impact on market performance is not at a level that warrants concern," and that passive non-arbitrage program buying would flow in during index weakness to provide support at the lower end.