Korea-US-China Tech Rally... Strong Liquidity: Big Win or Short-Term Bubble?

[Asia Economy New York=Correspondent Baek Jong-min, Beijing=Correspondent Jo Young-shin, Reporter Ko Hyung-kwang] The stock markets of Korea, the U.S., and China continue their rallies centered on technology stocks. The KOSDAQ index has doubled from its yearly low, and the U.S. Nasdaq index has surpassed the '11,000 mark.' China's 'ChiNext,' often called the Chinese Nasdaq, has also risen more than 56% compared to the beginning of the year. Despite concerns over an economic recession caused by the COVID-19 pandemic, a strong market is expected to continue for some time, supported by abundant liquidity. However, there are also warnings of overheating signals due to the rapid short-term surge.

◆ KOSDAQ Has Already Doubled = According to the Korea Exchange on the 7th, the KOSDAQ index closed at 854.12 the previous day, far exceeding the pre-COVID-19 highest point of 692.64 (February 17). Compared to the lowest point five months ago (428.35), it surged by 99.4%. The KOSDAQ's rise rate from its low is the highest among major global stock markets. The KOSPI, which closed at 2342.61 the previous day, also rebounded 60.7% from its yearly low of 1457.64. It ranks third in growth rate among major countries' stock markets, following the U.S. Nasdaq (61.9%).

The rally has been led by so-called 'BBIG (Bio, Battery, Internet, Game)' related stocks. Since the COVID-19 pandemic, digital-based economic activities such as remote work and online shopping have become the new normal, concentrating demand on these sectors.

The leading diagnostic kit company Seegene's stock price surged an astonishing 362% from 67,200 KRW on March 19 to 310,600 KRW the previous day. During the same period, bio-related stocks Genexine and Alteogen rose 202% and 230%, respectively. EcoPro BM, which produces cathode materials essential for secondary batteries, also increased 181% over the past five months.

The KOSPI rally was also driven by the 'BBIG 7'?Samsung Biologics, Celltrion, Kakao, Naver, NCSoft, LG Chem, and Samsung SDI. Shin Seung-jin, a researcher at Samsung Securities, said, "Similar to 'Cha-Hwa-Jeong' in the past, the benefits from social changes after COVID-19 are concentrated in BBIG," adding, "A differentiated market led by growth stocks, spearheaded by BBIG, is expected to continue for some time."

◆ Nasdaq and Shenzhen Rally Continues = The Nasdaq index has continuously hit record highs, surpassing the 11,000 level. On the 6th (local time), the Nasdaq closed at 11,108.07, up 1.0% (109.67 points). The Nasdaq achieved a remarkable rise from 10,000 to 11,000 in just 40 trading days. MarketWatch reported that this was the shortest period since 1999 when the Nasdaq rose from 3,000 to 4,000 in 38 trading days.

CNBC reported that the Nasdaq has risen 22% since the beginning of the year, and many analysts expect further gains in major stocks. The Wall Street Journal evaluated that the so-called 'FANG (FAANG)' stocks?Facebook, Apple, Amazon, Netflix, and Alphabet?are leading the rise. In particular, Facebook showed a significant increase amid expectations of launching a short video sharing service similar to TikTok.

The Chinese stock market is also likely to continue its rally centered on IT and technology stocks. The Shenzhen index, which has a high proportion of technology stocks, rose 33.75% from the beginning of the year to 2304.52 as of the 6th, showing rapid growth. ChiNext also rose 56.5% from the beginning of the year to 1798.12.

With expectations of China's economic recovery following COVID-19 control, the dominant view in the Chinese securities industry is that government support policies for semiconductors and information and communication sectors will drive technology stock gains. News that the Chinese government will exempt corporate taxes for up to 10 years for semiconductor and software companies has sparked signs of a rebound in IT-related stocks that had been taking a breather.

The company showing the biggest movement is SMIC, China's largest foundry (semiconductor contract manufacturer). It is attracting funds as it is seen as the biggest beneficiary of Chinese government policies. SMIC's fundraising is also proceeding smoothly. Last month, SMIC was secondarily listed on the STAR Market (Ke Chuang Ban) and raised 53 billion yuan (approximately 9 trillion KRW).

The weak dollar is also a positive factor for the Chinese stock market. The dollar's weakness against the yuan is expected to continue for some time, benefiting export companies. Continuous inflows of foreign capital, active participation of Chinese individual investors in the stock market, and the weak dollar are likely to act as positive factors for the Chinese stock market. However, U.S.-China tensions remain the biggest risk. The general consensus in the Chinese securities industry is that several hurdles must be overcome before the U.S. presidential election.

◆ "It Will Go Further" vs. "It's a Bubble" = There are views that the bull market based on abundant liquidity will continue for some time. Park Seung-young, a researcher at Hanwha Investment & Securities, said, "The increased stock supply this year is about 10 trillion KRW, while liquidity inflow from individuals is 60 trillion KRW," arguing, "We can still trust the power of liquidity." Hain Hwan, a researcher at Meritz Securities, said, "With second-quarter earnings announcements exceeding expectations, the valuation debate caused by the gap between stock prices and corporate earnings has somewhat been resolved," adding, "If earnings forecasts are not further revised downward, high earnings growth rates next year and the year after will support the trend of rising stock prices."

There are also concerns that the market has entered an overheated phase due to the rapid short-term surge. Seo Sang-young, a researcher at Kiwoom Securities, pointed out, "The domestic and international real economies have been severely damaged by the direct hit of COVID-19, so there may be a bubble," adding, "The gap between the stock market and the real economy has widened, and the elevated stock price valuations may also act as a burden." Kang Hyun-ki, a researcher at DB Financial Investment, said, "Looking at the Purchasing Managers' Index (PMI) reflecting companies' optimistic outlooks, expectations for the future are already at their peak," adding, "From now on, the extent to which recovery expectations can further rise will be limited."

The U.S. is in a similar situation. Concerns are rising that the recent surge led by a few 'IT giants' may be a bubble market beyond rational investment. Dryden Pence, Chief Investment Officer (CIO) of Pence Wells Management, told CNBC, "The market is divided into two," pointing out, "A few sectors are doing well, but the majority of the market is lagging behind."

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