[Practical Investing] Volatility in Semiconductor Stocks... Which Non-Semiconductor Sectors Are Worth Watching?

Financial stocks fell less even on "Black Thursday"
Power equipment stocks rebound as AI power demand rises

As volatility in the semiconductor sector, which had driven the KOSPI, rises, investors are turning their attention to non-semiconductor sectors. Analysts say investors should focus on financial stocks, which proved resilient even on October 15, when the KOSPI plunged on "Black Thursday," and power equipment stocks, whose share prices are recovering rapidly.

Financial stocks weathered the steep sell-off, but each has its own strengths

During the recent KOSPI plunge, financial stocks proved resilient, falling less than the broader index. As of October 16, the KOSPI was down 14.5% from the previous week, while banks fell 2.5%, insurers 5.8%, and securities firms 8.3%, posting relatively better returns than the index.

Banks stood out the most. Rising interest rates increase borrowing costs for other companies, but give banks an opportunity to boost interest income as lending rates rise. Expectations for shareholder returns, including dividends and share buybacks and cancellations, are also supporting investor sentiment. Since interest income accounts for a particularly large share of domestic banks' earnings, analysts expect rising interest rates to accelerate improvements in net interest margins (NIMs) from the fourth quarter.

Insurance stocks also held up relatively well during the sharp sell-off. Because insurers operate their businesses based on long-term contracts with policyholders, short-term fluctuations in the stock market affect their profitability differently than they do other financial businesses. The recent rise in long-term interest rates has also improved insurers' solvency ratios under the Korean Insurance Capital Standard (K-ICS), a positive development.

That does not mean earnings are strong right now. Insurers' third-quarter results are expected to fall short of market expectations due to weak investment income. Even so, securities firms are focused on the potential for a medium- to long-term recovery in the insurance industry's profitability. Analysts say that because it takes time for the effects of premium adjustments or regulatory changes to be reflected in actual earnings, an earnings recovery, once underway, could continue for a considerable period.

Securities firms are in a somewhat different position from banks and insurers. They are sensitive to market shocks because stock trading can decline when the market falls, and losses can arise on their holdings. However, analysts say the recent steep drop in share prices has already reflected much of the weaker earnings outlook. Their appeal as dividend stocks is also adding to their attractiveness. Hana Securities estimates this year's expected dividend yields at 8.5% for Kiwoom Securities, 8.2% for NH Investment & Securities, and 8.1% for Samsung Securities. "Despite a short-term slowdown in earnings, dividend appeal will help put a floor under share prices," said Ko Yeonsu, a researcher at Hana Securities.

Still betting on AI... Power equipment stocks draw attention as their customer base expands

Power equipment stocks are attracting attention as demand for electricity from AI data centers increases. On October 19, LS ELECTRIC rose 4.78% and Hyosung Heavy Industries gained 1.54% from the previous trading day. Compared with October 17, they were up 10.26% and 10.34%, respectively.

The earnings growth outlook is also strong. According to Yuanta Securities, based on current consensus estimates, this year's EPS (earnings per share) growth rate is 49.9% for Hyosung Heavy Industries and 88.2% for LS ELECTRIC. EPS over the next 12 months is also expected to rise 55.3% and 50.6%, respectively, from the preceding 12 months. These figures are higher than SK hynix's 40.5% growth rate.

The expansion of their customer base is also a positive factor, as big tech companies are moving to secure power directly. They are broadening their involvement beyond simply purchasing electricity to include shouldering the cost of expanding power grids and directly procuring equipment. "Changes in the customer base are also evident in South Korea, with Hyosung Heavy Industries securing an order worth KRW 386.5 billion for extra-high-voltage transformers from a big tech company, and HD Hyundai Electric signing a long-term framework agreement worth up to KRW 1.1212 trillion," said Son Hyeonjeong, a researcher at Yuanta Securities.

In line with the U.S. push to expand supply, Korean companies are expanding their local factories. Hyosung Heavy Industries' Memphis facility, which currently has annual production capacity equivalent to about KRW 300 billion in revenue, will add about KRW 138 billion from next year. After its expansion is completed, HD Hyundai Electric's Alabama facility will add KRW 200 billion in production capacity to its existing capacity of about KRW 700 billion. LS ELECTRIC is expanding its Utah facility with the goal of reaching annual production capacity of about KRW 500 billion. "If the existing order backlog and newly secured customers support these volumes, the visibility of earnings growth next year will also improve," Son said.

This content was produced with the assistance of AI translation services.