'Don't just watch semiconductors next year': brokerages pick 2027's market leaders

The rally in South Korea's stock market, driven by large-cap semiconductor stocks such as Samsung Electronics and SK hynix, is expected to broaden next year to non-semiconductor sectors including secondary batteries, biotech and financials. Analysts say that as semiconductor earnings continue to improve, rising profits and valuation reratings in non-semiconductor sectors could diversify the market's leadership.

Six brokerages — Shinhan Securities, Hana Securities, Daishin Securities, Hanwha Investment & Securities, Yuanta Securities Korea and iM Securities — identified secondary batteries, biotech, financials and automobiles as promising sectors for next year in their 2027 market outlook reports published this month, according to the financial investment industry on Friday.

The brokerages cited earnings improvement at non-semiconductor companies, the unwinding of share price undervaluation, and changes in interest rates and exchange rates as the main variables that could trigger a leadership rotation. However, views within the industry were divided on when buying interest would flow into individual sectors and whether semiconductors would maintain their dominance.

Hana Securities forecast that LG Energy Solution and Samsung Electro-Mechanics would compete for the third-largest market cap slot in the first half of next year, with Samsung Biologics and Hyundai Motor vying for the same position in the second half. The brokerage cited an earnings rebound for LG Energy Solution and an expectation of strong profit growth for Samsung Electro-Mechanics even without a base effect. For Samsung Biologics, the argument was that its share price has been overlooked for an extended period despite steady profit growth, while Hyundai Motor was highlighted for its low price-to-book ratio relative to its rising return-on-equity outlook.

"Non-semiconductor companies with improving earnings growth and rising corporate valuations could emerge as the new third-largest by market cap," said Lee Jae-man, a researcher at Hana Securities.

The second quarter of next year was cited as a potential turning point for a leadership shift. Ha Jang-gwon, a researcher at Hanwha Investment & Securities, forecast that semiconductors and IT hardware would lead gains through the first quarter before buying interest spreads to banks, steel, transportation and utilities from the second quarter onward. Those sectors would benefit as upward pressure on interest rates eases and the won strengthens, the analysis held. Hanwha Investment & Securities projected the won-dollar exchange rate would fall from 1,350 won in the first quarter to 1,270 won in the fourth quarter of next year.

Whether semiconductor earnings growth slows is also a key variable in gauging any leadership rotation. Noh Dong-gil, a researcher at Shinhan Securities, analyzed seven past instances when semiconductors' share of trading volume peaked and found that non-semiconductor sectors outperformed semiconductors in the year following the peak on only three of those occasions. "The condition for a broadening into non-semiconductor stocks was a slowdown in semiconductor earnings-per-share growth," Noh said. Noh recommended banks as a sector to hold defensively during a share price downturn, and advised selectively picking stocks with rising earnings forecasts in K-beauty, large-cap biotech and battery cells for energy storage systems.

Daishin Securities categorized promising sectors by earnings improvement, undervaluation and shareholder returns. Semiconductors, defense, pharmaceuticals, biotech, steel and power equipment were flagged for their undervaluation appeal; secondary batteries, insurance and construction for earnings improvement; and telecoms and automobiles for shareholder return potential. The brokerage also named Samsung SDI, Hanwha Aerospace, Hyundai Marine & Fire Insurance, Hyundai Engineering & Construction, KT Corp and Kia as its top picks for next year. Yuanta Securities Korea included Samsung Electro-Mechanics, Celltrion and Hyundai Engineering & Construction among its recommended stocks for next year, based on earnings growth momentum and the stability of earnings forecasts.

Even if buying interest broadens into non-semiconductor sectors, semiconductors are still expected to exert considerable influence on the market. "Semiconductors account for roughly 80 percent of current Kospi earnings estimates, so next year's Kospi earnings and index direction will be heavily determined by semiconductor earnings and share prices," said Kim Yong-gu, a researcher at Yuanta Securities Korea.