[Good Morning Stock Market] "Uncertainty from the US Persists... Fading Optimism"

US Presidential Election, Stimulus Bill Passage Delays Remain Variables

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The pace of rise in both the U.S. and domestic stock markets is slowing down. This is analyzed to be due to increasing external uncertainties such as the U.S. presidential election and delays in the passage of additional economic stimulus packages, which are shaking the grounds for optimism. In this situation, as profit-taking pressure increases, investor sentiment appears to be wavering.

◆ Haedoon Han, SK Securities Researcher = The upward momentum of the stock market is somewhat slowing down. This is because external uncertainties such as the U.S. presidential election and stimulus delays have increased profit-taking pressure. In particular, as Democratic presidential candidate Joe Biden's approval ratings lead, discussions about sector rotation toward value stocks, so-called 'Biden play,' are active. However, I am skeptical about this. The renewable infrastructure investments that Biden focuses on are ultimately growth stocks. Unlike the domestic stock market, the relative strength of growth stocks even amid Biden's recent lead in approval ratings illustrates this well. Even if Biden is elected, it is not easy for the market sentiment to change dramatically, and there are many variables in the U.S. election system to bet on Biden's victory.

The upcoming third U.S. presidential candidate TV debate next week will be important for discussing additional stimulus packages, but the reality is not easy. The fact that policy uncertainty continues until the election and possibly after the election is a burden. Fortunately, expectations for the Q3 earnings season are high. The KOSPI's Q3 net profit is expected to increase by 15.9% year-on-year and 26.3% quarter-on-quarter. Although S&P 500 earnings are expected to decrease by about 20% compared to last year, U.S. corporate earnings have generally exceeded market expectations. Also, earnings in leading sectors such as IT and healthcare are expected to be similar to last year.

Ultimately, existing leading stocks also show good earnings. Domestically, earnings improvements are expected in semiconductor, automobile, IT home appliances, and display sectors. In the context of fading expectations for additional stimulus package discussions and persistent U.S. election uncertainties, sectors with high earnings improvement expectations can be alternatives.

The variable is the exchange rate. Generally, a strong won is positive for the stock market due to capital inflows. However, foreign capital is not returning to the domestic stock market. This is because expectations for the resumption of global economic activities are low. In fact, foreign capital is selectively buying in semiconductor, IT home appliances, and display sectors. Moreover, these sectors with bright prospects are mostly export stocks, and won appreciation can lower earnings expectations. It is necessary to pay attention to exchange rate trends for the time being.

◆ Donggil Noh, NH Investment & Securities Researcher = Both the U.S. and domestic stock markets are commonly experiencing a slowdown in the pace of rise. This is because the likelihood of realization of variables that acted as the biggest background for optimism has decreased. The U.S. Congress is struggling to agree on additional stimulus packages before the election. The possibility of contesting the election results and consequent delays in stimulus packages are raising concerns about fiscal policy gaps. The suspension of clinical trials for new COVID-19 drugs also negatively affects risk asset investment sentiment. The election-related uncertainties, which seemed to have subsided, may resurface once again through the final TV debate.

Investors in the U.S. derivatives market have built large hedge positions through Nasdaq futures shorts and VIX (S&P 500 volatility index) futures to reflect uncertainties before and after the election. At the end of last month, the Nasdaq futures short position reached the largest since 2006. The fact that large hedge positions have been set reduces the possibility of accelerated net selling due to increased volatility. Investor sentiment considering VIX futures prices expects volatility to ease in early to mid-December. Although the pace of index rise may slow down for the time being, it is necessary to keep in mind the possibility of a rebound after the election.

This is a phase where disappointment due to uncertainty about economic improvement factors may be expressed. It is expected to fluctuate in a box range until the U.S. election. The possibility that individual investors' funds may be withdrawn to avoid capital gains tax at year-end should also be considered. The fact that individual investors' net buying is concentrated more on KOSPI than KOSDAQ may also affect the slowdown in large-cap stock returns. However, the inflow of funds aiming for year-end dividends may partially offset individual investors' net selling. Large-cap stocks are expected to be relatively better alternatives. In the phase where expectations for economic recovery rise after the U.S. election, it is necessary to prioritize attention to export stocks oriented toward the U.S. Domestic large-cap stocks such as semiconductors, handsets, and automobiles will be valid for a low-price buying strategy during corrections.

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