"Stock Market Correction Is Short-Term... Should Be Seen as an Opportunity to Increase Risk Asset Allocation"

Liquidity Supply Remains Strong and Low Interest Rate Trend Expected to Continue Long-Term
Gold and Growth Stocks Likely Biggest Beneficiaries... "Increase Allocation During Short-Term Corrections"

On the 25th, the KOSPI index opened at 2295.16, up 0.99% (22.49 points) from the previous trading day, as dealers were working in the Hana Bank dealing room in Jung-gu, Seoul. On the same day, the KOSDAQ index rose 1.36% (11 points) to 817.95, and the won-dollar exchange rate started at 1169.5 won, down 3.2 won from the previous trading day. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Minwoo Lee] The US Nasdaq index, which had shown a steep upward trend, fell more than 10% from its peak, increasing volatility in global financial markets. However, analyses suggest that the price adjustments of risk assets such as stocks and commodities will be temporary. This is because governments and central banks around the world are likely to continue policies to prevent economic recessions, and the recovery of indicators due to the normalization of economic activities is effective in a liquidity-rich environment.

According to Daishin Securities on the 27th, the recent downturn is considered a period to increase the weighting of stocks and gold. It is analyzed that the domestic market, expected to benefit from improvements in global trade and the strengthening of the Korean won, and US growth stocks leading changes in the industrial environment after the COVID-19 pandemic will drive stock market strength in the fourth quarter.

Accelerating Liquidity Supply

Active policies by governments and central banks and abundant liquidity released worldwide have defended the global economy. The recovery of expected economic indicators added to this, sustaining the bullish trend of risk assets until last month. In this flow, the global liquidity environment looks better than in March, when COVID-19 fears peaked.

Researcher Seungbin Cho of Daishin Securities said, "The global money supply index (a Bloomberg indicator summing major countries' M2) has sharply risen since mid-March, continuing its record highs," adding, "Last month, the year-on-year growth rate of the global money supply index improved for six consecutive months, reaching +17.0%. This abundant liquidity environment, likely to persist for a considerable period, will strongly support the upward trend of global stock markets."

Manufacturing Production Index Recovery... Positive for Corporate Earnings and Commodity Prices

The global manufacturing production index sharply recovered in the third quarter. After hitting -29.9 in May, deteriorating to levels seen during the 2008 global financial crisis, it began to recover from June, improving for three consecutive months and reaching its highest level since June last year. This is regarded as a refreshing piece of news for the stock market, which had concerns about overvaluation. The global stock index earnings revision ratio recorded 8.3% last month. It is the first positive reading in two years since August 2018. The global stock index's 2020 earnings per share (EPS), which had fallen 31.1% this year, is bottoming out and aiming for a turnaround.

Commodity prices are also recovering. The year-on-year growth rate of the CRB index (based on month-end index) that fell -36.4% in April rose to -10.1% last month. Researcher Cho explained, "Abundant liquidity released worldwide and production disruptions in some origins due to COVID-19 were among the reasons for the rise in commodity prices. However, demand increases from the normalization of economic activities are a driving force that can lead to commodity price rises in the mid to long term, so attention should be paid to the recovery of the global manufacturing production index."

Slow Consumer Recovery Due to Employment Uncertainty

Unlike corporate conditions, consumer sentiment recovery is relatively slow. While a strong housing market used to positively influence consumer sentiment, its impact has recently been minimal. The US Federal Reserve quickly lowered the benchmark interest rate and purchased mortgage bonds, lowering the 30-year mortgage rate to around 2.8%. With eased interest burdens, the housing market quickly revived. The National Association of Home Builders (NAHB) housing market index recorded an all-time high of 83 last month.

Nevertheless, consumer sentiment recovery remains sluggish due to employment insecurity. Although the global unemployment rate, which surged due to COVID-19, has declined for three consecutive months recently, it remains higher than before the pandemic. The number of unemployed in the US has decreased since April, but this is due to temporarily laid-off workers returning to their jobs. Meanwhile, the number of permanently unemployed workers is increasing, with a growing rate. Researcher Cho noted, "The job search difficulty index released by the Conference Board rose again last month, indicating the need to consider the possibility of a slowdown in employment indicators." He added, "If the pace of employment improvement slows, it could negatively affect consumer sentiment and delay economic recovery."

Recommendation to Increase Growth Stock Weighting Amid Expectations of Real Interest Rate Rebound

The US Federal Reserve announced it will continue asset purchases to maintain low interest rates for a considerable period. A decrease in real interest rates means that government bond yields do not properly reflect inflation. Therefore, interest in risk assets is expected to increase rather than bonds. Real interest rates played an important role in the process where growth stocks led the global stock market for over a decade. Researcher Cho explained, "Value stocks, which have high weightings in finance, energy, and materials sectors sensitive to earnings and interest rates, may suffer earnings declines due to low interest rates." He added, "The low interest rate environment justifies the high valuations of growth stocks, attracting investors."

He advised preparing for a short-term rebound in real interest rates. The recovery in commodity prices has somewhat stalled, increasing the likelihood of a decline in the breakeven inflation rate (BEI). Researcher Cho said, "There is limited room for further declines in government bond yields, so if BEI falls, real interest rates may rise." He explained, "Gold and growth stocks, which benefit from falling real interest rates, may also face price adjustments." However, he viewed the rise in real interest rates as temporary. Cho added, "Due to the Fed's tolerance of inflation and maintenance of a low interest rate stance, real interest rates may remain below previous lows in the long term. This short-term rise should be used as an opportunity to increase allocations to gold and growth stocks."

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