[Good Morning Stock Market] "Dollar Weakness Progressing... Starting Point for Emerging Markets Stock Revaluation"

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[Asia Economy Reporter Kum Boryeong] Amid the continued weakness of the dollar, an analysis has emerged that this phenomenon marks the starting point of a revaluation of emerging market stocks. Considering the impact of the novel coronavirus disease (COVID-19) in the United States and the Federal Reserve's (Fed) accommodative monetary policy stance, the likelihood of dollar weakness is high. Meanwhile, opinions have also been expressed that the market has rapidly shifted toward growth industries due to the effects of COVID-19.

◆ Kim Minsu, Researcher at Shinhan Financial Investment = The dollar weakness is ongoing. The dollar index, which averaged 98.5 points from the beginning of the year to June, has now dropped to 93.4 points. The downward revision of economic recovery expectations due to the second wave of COVID-19 in the U.S., the expansion of liquidity supply centered on the Fed and confirmation of its accommodative policy stance, and the faster-than-expected agreement on the COVID-19 recovery fund, which strengthened the Eurozone economic momentum and the euro's appreciation, are the driving factors.

Dollar weakness provides a favorable background for risk assets and emerging market cyclical sectors, but it is likely to unfold in a pattern different from the past. Typically, profits in cyclical sectors expanded during phases of trade volume recovery. Although most countries have reopened their economies, a clear recovery in global exports has not yet been observed. Unless global trade volume recovery is guaranteed, expectations for cyclical sectors remain limited. It seems more likely that fundamentals and supply-demand advantages centered on growth stocks and IT will continue rather than cyclical sectors. There has even been talk of a bubble in U.S. tech stocks. However, unprecedented levels of liquidity, a low-interest-rate environment, and fundamentals verified through second-quarter earnings still support growth stocks.

The IT sector's business conditions also act as a positive factor. The pandemic has accelerated the structural growth of the untact (contactless) industry. An increase in PC shipments has been observed due to the shift to remote work and online classes. The Chinese government's investment in 5G-based advanced industries has also expanded smartphone shipments. The survey index has improved due to increased IT demand. The New York and Philadelphia Fed manufacturing surveys, which correlate with global semiconductor sales and capital expenditures, have begun to turn upward. The growth potential of the untact industry was also verified through the second-quarter earnings announcements of major tech companies. The IT value chain, which was damaged by the pandemic, is rapidly normalizing centered on the G2 (U.S. and China). It is time to pay attention to emerging market IT, which is expected to benefit from the resulting trickle-down effects.

◆ Lee Jinwoo, Researcher at Meritz Securities = Changes in stock prices have already been underway. The leading stocks, represented by internet software + secondary batteries + bio, are not newly created by COVID-19 but are the result of an accelerated existing growth trend. In the case of the S&P 500, the energy + materials (chemicals, steel) sector accounts for only 5.1% of the total market, marking the lowest level since 1995, while the IT + communication services + healthcare sectors account for 53%, a historic high.

Korea is not much different. The energy + materials (chemicals, steel) sector accounts for 10.6% of the total, while IT + communication services + healthcare sectors have expanded to 54.2%. This means that the explanatory variables of the market have already shifted from traditional cyclical stocks to growth industries.

A recent variable in the market is the 'dollar.' This is because the trend of a strong dollar, which has continued since 2011, is showing signs of change. A change in the dollar trend means a shift in the flow of money in the global financial market, and a dollar-weakness environment stimulates capital movement outside the U.S. rather than within it. From the perspective of the domestic stock market, a dollar-weakness environment is not a bad environment.

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