[Good Morning Stock Market] Decline in Safe Asset Preference as Economic Activities Resume... Growth Stock Focus Spreads to Emerging Market Stocks

On the 8th, when the fourth phase of in-person classes for first-year middle school students and fifth- and sixth-grade elementary students began, first-year students were heading to school at a middle school in Seoul. According to the Ministry of Education, 1.35 million first-year middle school and fifth- and sixth-grade elementary students attended school that day, marking 98 days since the original school start date of March 2 this year. Previously, third-year high school students first returned to school on the 20th of last month, followed by a phased return for each grade. With this day's attendance, a total of 5.95 million elementary, middle, and high school students nationwide began in-person classes for the first semester of this year. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Kum Boryeong] As economic activities, which had been halted due to the novel coronavirus infection (COVID-19), resume, a decline in the preference for safe-haven assets is being observed. Furthermore, the phenomenon of capital concentration in growth stocks is spreading to cyclical rebounds in emerging market stocks and economically sensitive sectors, according to analysis.

◆ Han Yoonji, Researcher at Shinhan Financial Investment = Changes in investment sentiment due to COVID-19 were confirmed through the inflow and outflow trends of funds in the government bond market. The flows in March and May, when global economic activities were most severely impacted by the spread of COVID-19, were compared. The fund flows between developed and emerging markets diverged sharply. In the second week of March, developed market government bonds recorded a record weekly inflow of $13 billion, whereas in the third week, emerging market government bonds experienced a record weekly outflow of $7 billion.

In May, the severe decoupling between developed and emerging market government bonds eased. The weekly average inflow into developed market bond funds in May was only $400 million. Until the third week of May, the weekly average inflow was $800 million, but in the last week, as risk asset preference rapidly expanded, $900 million was withdrawn. The scale of outflows from emerging markets also significantly decreased to a weekly average of $200 million. The outflow in the last week was only $60 million.

Changes in investment sentiment were also confirmed by country. The inflow intensity (inflow amount relative to total fund assets) into representative safe-haven assets such as U.S. and German government bond funds was 8.1% and 7.3% in March, but slowed to 0.8% and 0.2% in May. Countries that reversed from net outflows in March to net inflows in May include Australia, China, and Japan. South Africa's net inflow intensity surged from 0.3% in March to 11.3% in May. With the resumption of G2 conflicts related to the Hong Kong Security Law at the beginning of June, it is judged that further expansion of risk asset investment sentiment is unlikely.

◆ Park Seokjung, Researcher at Shinhan Financial Investment = The debate over whether the stock market rally will continue is shifting its focus to the possibility of changes in leading stocks. The capital concentration in growth stocks has expanded to emerging market stocks and economically sensitive sectors due to the subsiding spread of COVID-19, easing of economic lockdowns, and expectations of confirming the economic bottom, resulting in a cyclical rebound.

Concerns about the irrational rally in the stock market are not dismissed, but attention should be paid to the synchronization of price indicators, which had shown decoupling from stock prices. Although a trend reversal cannot yet be declared, survey indicator rebounds, rising interest rates, international oil price rebounds, and dollar weakness are occurring simultaneously. This not only adds justification to the recent rally but also provides a background for changes in leading stocks.

Despite the clear price superiority of developed markets and concerns about emerging markets, the fundamentals of emerging markets are relatively robust. When the market enters a recovery cycle (earnings-driven market) from a monetary policy and tech stock-centered (financial-driven market) phase, the relative strength of emerging market stocks is a timely topic for discussion. Compared to the beginning of the year, earnings estimates for developed country stock markets have been revised downward by 22.6%, whereas for emerging markets, the downward revision was relatively limited at 17.7%. Despite profit deterioration in resource-rich countries due to falling commodity prices, China's robust earnings growth limited the downside.

Four necessary and sufficient conditions for the recent relative strength of emerging market stocks (weak dollar, international oil prices, survey indicators, interest rate rebound) are turning favorable. Specifically, as expectations for global economic recovery strongly spread, the strength of risk currencies appeared. Oil prices stabilized due to eased supply-side concerns and expectations of global demand recovery. Both developed and emerging markets saw a sharp rebound in survey indicators. With added expectations of passing the bottom in real indicators, interest rates are rising. As all these conditions improve, even countries in the COVID-19 spread phase such as Brazil and India have experienced technical rebounds.

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