Stock Market Near All-Time Highs... Attention Needed on Manufacturing Sector

Strong Demand for Manufactured Goods... Financial Conditions Still Favorable
"Focus on Sectors with Clear Performance Improvement"

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), is shown holding a press conference after the Federal Open Market Committee (FOMC) regular meeting on the 28th of last month (local time), displayed on the electronic board of the New York Stock Exchange (NYSE). [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The U.S. second-quarter Gross Domestic Product (GDP) growth rate fell short of expectations, raising concerns about potential burdens on South Korea, an export-driven economy. Analysts suggest paying attention to sectors such as steel and metals, chemicals, and energy, which have shown relatively lower profitability compared to recent profit improvements.

On the 1st, Samsung Securities made this forecast regarding the stock market. In fact, the U.S. second-quarter GDP growth rate was 6.5%, significantly below the market consensus of 8.4%. Since double-digit growth was also anticipated, the reaction was one of disappointment. On the day of the announcement, the U.S. stock market leaned more towards optimism, but Asian markets broadly remained weak. This was because economies exporting to the U.S. inevitably had to apply discount rates.

However, U.S. Personal Consumption Expenditures (PCE) still showed a stronger-than-expected rise. According to the U.S. Department of Commerce on the 30th (local time), the PCE price index for June rose 4.0% year-over-year, the largest increase in 13 years since July 2008 (4.1%) just before the global financial crisis. Compared to the previous month, it also increased by 0.5%. Additionally, the inventory change rate recorded a negative figure, creating room for further inventory accumulation. This means production capacity must be increased to meet the overflowing demand for goods.

Supply-side constraints due to the COVID-19 Delta variant are lasting longer than expected. Various production inputs, including labor, are facing difficulties. Although the fatality rate is lower than before, the surge in confirmed cases could pressure service demand such as travel. This naturally stimulates substitute demand for manufactured goods. As planned service usage becomes impossible, consumers tend to buy more goods. Samsung Securities researcher Seojeong Hoon said, "Considering the inventory shortage phenomenon, many manufactured goods will need to be produced at an unprecedented speed and scale in the second half of the year," adding, "The domestic economy, which focuses on intermediate goods exports, can expect sufficiently positive momentum."

Financial conditions are also evaluated as favorable. Researcher Seo explained, "Although tapering (reduction in asset purchases) was further specified through last month's Federal Open Market Committee (FOMC) of the U.S. Federal Reserve (Fed), the possibility of an earlier-than-expected tightening remains low," and added, "Fed Chair Jerome Powell's statement that interest rate hikes are not currently being considered demonstrates a firm commitment to a moderate policy stance."

Signals of tightening reflected in financial markets are gradually stabilizing. The limited upward movement of the U.S. 2-year Treasury yield and the dollar index aligns with this context. Seo said, "The absence of a sustained dollar strength trend means the re-flation trade (selling safe long-term bonds and buying stocks in anticipation of economic and inflation recovery) still has life left," and "Emerging markets, including South Korea, can continue to enjoy this positive momentum."

However, since global stock markets, including South Korea, are near all-time highs, it is expected that ordinary positive factors will not be enough to drive broad market gains. The sporadic rotation of sectors and individual stock rallies also reflect this context. The summer vacation season, when trading volumes typically decline, was cited as another reason for sluggish market trends. Additionally, regulatory controversies involving the Chinese government have dampened investor sentiment across Asian markets.

In this environment, it is advised to focus on stocks with more pronounced earnings improvements. Researcher Seo said, "As uncertainty increases, the ability to generate definite profits becomes more important," and forecasted, "Considering the macroeconomic situation, interest in sectors such as steel and metals, chemicals, energy, IT hardware, and securities will be valid."

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