Easing Inflation and Early Tightening Concerns... "Focus on the Sluggish Auto and IT Sectors"

Favorable Conditions Created for Emerging Market Stocks
Attention Needed on Sectors with Large Foreign Selling

On the afternoon of the 21st, when the KOSPI and KOSDAQ closed lower, the KOSPI and KRW/USD exchange rate were displayed in the Hana Bank dealing room in Jung-gu, Seoul.
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Factors that had been driving inflation increases, such as raw material prices, have recently begun to slow down. Concerns over early tightening by central banks are also easing. With expectations of gradual capital inflows from foreign investors, there is an analysis suggesting the need to pay attention to the automobile and information technology (IT) sectors, which had experienced strong selling pressure.

On the 23rd, Samsung Securities made this forecast for the future market trend. Earlier, on the 12th (local time), the U.S. Consumer Price Index (CPI) for April was announced, showing a sharp 4.2% increase compared to a year ago, marking the highest level in 13 years. Although inflation concerns grew immediately after the announcement, the atmosphere has somewhat calmed recently. Confidence in economic recovery remains strong, but the outlook for steep price increases and the possibility of early tightening by the U.S. Federal Reserve (Fed) are currently being reassessed.

In fact, the U.S. 10-year Treasury yield, which had been rising along the expected inflation path, has recently fallen to the low 1.6% range. Raw material prices, which had been driving producer prices, are also showing signs of pausing. Retail sales and consumer sentiment have also fallen short of expectations due to a backlash against rapidly rising product prices. Samsung Securities researcher Jung-hoon Seo stated, "It can be inferred that private demand has not recovered enough to absorb the higher prices," adding, "Considering these factors together, the inflation momentum that had been an obstacle to stock market gains is likely to slow down, which will be a favorable factor for emerging markets."

Emerging markets must worry about both the benefits and side effects of inflation. If exposed to uncontrollable inflation, currency depreciation and consequent capital outflows may occur. This is also the reason why countries with weak fundamentals, such as Russia and Brazil, have proactively raised interest rates. However, since the dollar is showing weakness, easing could stabilize financial conditions and secure policy capacity, including fiscal and monetary measures.

Earlier, in the New York foreign exchange market on the 19th (Korean time), the dollar index fell 0.45% from the previous day to 89.73, dropping below the 90 mark for the first time since February. The dollar index represents the value of the dollar against six major currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. After the release of the Federal Open Market Committee (FOMC) minutes on the 20th, which mentioned tapering (reducing asset purchases) for the first time, the index rose above 90 again, but the recent trend is generally downward.

This combination of a weak dollar trend and moderate inflation is analyzed to be favorable for emerging market stocks. Especially for countries like Korea, which have the characteristics of a small open economy, export momentum can be further strengthened. The fact that the economic activities of Korea’s export destinations have not yet fully normalized paradoxically means there is much room for further improvement.

Researcher Seo said, "Although the domestic stock market has been stagnant due to the absence of special policy events, it is necessary to focus more on fundamental improvements at this point," adding, "Considering that further financial easing is not easy, investor interest will inevitably focus on earnings and price merits. Therefore, attention should be paid to the automobile, IT, and healthcare sectors, which have experienced deep foreign selling and prolonged price corrections."

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