South Korea’s main benchmark Kospi index is forecast to sustain a bear market rally in August but its gains are likely to be capped at 2,600 due to economic downturn coupled with strong inflation, according to local brokerages.

The Kospi added 0.75 point to close at 2,452.25 on Monday after staying positive for six straight sessions since July 25. It fell 0.84 percent, or 20.66 points, to 2,431.59 by midday Tuesday.

Major local securities firms Shinhan Investment, Daishin Securities, and Kiwoom Securities on Monday forecast that the Kospi would rise to the 2,550~2,600 levels, but advised against big bets as the rally could be a technical rebound after massive selloffs.

They expect the gains would stay in a boxed range amid lingering concerns that the U.S. Federal Reserve (Fed) would continue with aggressive monetary tightening to control high inflation. Experts have been warning the U.S. economy and elsewhere could face slowdown or recession after strong inflation eases.

“The technical rebound in the third quarter is considered a process to return the short-term valuation to normal levels,” said Lee Kyung-min, a senior researcher at Daishin Securities. “The Kospi is expected to dip again after confirming a downturn in the manufacturing industry and earnings deterioration from the fourth quarter to the first quarter next year.”

Market experts advise investors to cherry-pick undervalued growth stocks in the IT, automobile, and software sectors with solid earnings growth during the bear market rally. As soon as inflation peaks out, growth stocks are expected to recoup most losses.

“The media education, software, display, and IT sectors have underperformed the most since the beginning of the year. Firms with high growth potential will likely rebound down the road,” said Han Ji-yeong, a researcher at Kiwoom Securities.

KB Securities’ analyst Lee Eun-taek also found the down spiral in platform stocks had been excessive.

By Oh Dae-seok, Kang In-seon, and Jenny Lee

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