[Good Morning Stock Market] 'KOSPI's Advance Halted'... Caution and 'Wait-and-See Sentiment' Ahead of FOMC

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[Asia Economy Reporter Lee Seon-ae] On the 16th, the domestic stock market is expected to show a slightly weak trend due to cautious sentiment ahead of the June Federal Open Market Committee (FOMC) regular meeting.

The New York stock market fell across the board. On the 15th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 34,299.33, down 94.42 points (0.27%) from the previous session. The Standard & Poor's (S&P) 500 index fell 8.56 points (0.20%) to 4,246.59, and the tech-heavy Nasdaq index closed at 14,072.86, down 101.29 points (0.71%) from the previous session. The Dow index fell for two consecutive days. Although the S&P 500 and Nasdaq indices hit record highs based on the previous day's closing price, they turned to a downward trend after four days due to FOMC caution.

Investors focused on the Federal Reserve's (Fed) FOMC regular meeting scheduled from today through tomorrow, economic indicators, and movements in U.S. Treasury yields. Fed officials are expected not to make significant policy changes at this meeting, but investors worry that the market could be shaken by interest rate forecasts, economic growth rates, and inflation outlooks. Attention is on what remarks Fed Chair Jerome Powell will make regarding tapering, the reduction of asset purchases.

◆ Park Sang-hyun, Researcher at Hi Investment & Securities = Although the rally is somewhat frustrating, the reality is that despite the KOSPI index hitting record highs for two consecutive days, it remains unclear whether foreign investors will switch to net buying domestically as expected. Since June, foreign investors have net bought about 400 billion KRW in the exchange market, but compared to the net selling scale in May (about 8.5 trillion KRW), the net buying volume is relatively small. Especially considering that cumulatively since January last year, foreign investors have net sold about 40.9 trillion KRW (based on the exchange), and 16.3 trillion KRW this year alone, it is limited to interpret the slight net buying in June as a fundamental shift to net buying.

It is difficult to accurately identify the reasons behind the continued net selling of domestic stocks by foreign investors. Last year, it could be interpreted as an extreme preference for safe assets due to the pandemic, but this year, if reasons are to be given, they might include the slowdown in momentum of growth stocks such as semiconductors and tapering risks; however, these reasons alone are insufficient to explain foreign net selling.

The domestic export cycle has played an important role in explaining foreign investors' net buying trends in domestic stocks, but recently, the synchronization between export conditions and foreign net buying has significantly weakened. Therefore, it can be interpreted that variables other than domestic economic or corporate fundamentals are influencing foreign investment flows. First, some funds are returning to safe assets due to tapering and economic uncertainty, which seems to partially affect foreign trading in the domestic market. Concerns about emerging market economies due to COVID-19 uncertainties also appear to be obstacles preventing the expansion of foreign investors' net buying of domestic stocks. Lastly, China risk negatively impacts the re-entry of foreign funds into the domestic market. Given that the domestic economy and industries still heavily depend on China, the unresolved U.S.-China conflict risk is interpreted as blocking foreign inflows into the domestic stock market despite favorable fundamentals such as export growth.

What are the conditions for foreign investors' net buying of domestic stocks to fully resume? Since the true intentions of foreign investors are unknown, it is difficult to predict their return. Conditions for foreign funds to return to the domestic stock market likely include improvement in the domestic semiconductor industry, visible strong recovery momentum in non-U.S. emerging markets, recovery of Asian supply chains, and easing of U.S.-China conflict risks. In particular, the strong rebound of emerging manufacturing economies through the recovery of Asian production countries as COVID-19 subsides, along with easing of U.S.-China tensions, is expected to be an important factor. In summary, while tapering-related uncertainties clearly affect foreign capital flows, the most important variables for foreign re-entry into the domestic market are the rapid restoration of Asian supply chains and the easing of uncertainties related to U.S.-China conflicts from the perspective of fundamentals and uncertainty reduction.

◆ Lee Kyung-soo, Researcher at Hana Financial Investment = South Korea's advancement to a developed country status is inevitable. The longer the investment period, the more sensitive one should be to the price-earnings ratio (PER) function, which is more in the sentiment domain than the earnings variable. From that perspective, I believe a recent opportunity has come for domestic growth stocks to outperform. I have mentioned that the function of growth and value stocks consists of factors such as 'interest rates' and 'scarcity of earnings.' As interest rates rise and earnings improve, value stocks tend to strengthen. However, recently, the rise in interest rates has slowed, and earnings improvements have also decelerated. In particular, I emphasize that the rate of change in overall KOSPI earnings is the most important trigger for the relative performance of growth and value stocks. During periods of overall earnings slowdown, a premium is created for scarce earnings stocks. Assuming supply and demand remain constant, the quantity of earnings decreases, highlighting a few stocks with growth potential, leading to a stronger concentration of 'supply and demand' relative to 'earnings.' The reason I recommended value stocks from the beginning of the year was that the earnings improvement trend was strong, and undervaluation relative to earnings became a guide for supply and demand. However, from the Q2 earnings season, when the base effect starts to diminish, momentum is unlikely to amplify. The profit momentum of sectors that led H1 earnings, such as energy, materials, and shipping, is gradually weakening. Also, the semiconductor and automobile sectors, which have the highest expectations, do not seem to have their annual consensus for this year further revised upward. Ultimately, the expected market trend is a market where individual stocks with good earnings or the growth stock camp's mid- to long-term growth potential stand out as alpha. Until a sharp rise in interest rates or strong earnings upgrades appear in the Q2 earnings preview season, I believe there will be opportunities for growth stock portfolios to outperform.

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