Investment Strategies for Global Stock Markets During Rising Interest Rates

[Asia Economy Reporter Song Hwajeong] Uncertainty over rising interest rates is affecting global stock markets. While rising interest rates are expected to weigh on stock prices for the time being, the burden is projected to be greatest in the order of Nasdaq, developed countries, and emerging markets.

According to KTB Investment & Securities on the 10th, among the indicators scheduled to be announced this week, the U.S. core inflation and producer prices for September are variables that could directly impact interest rates, and the minutes of the U.S. Federal Open Market Committee (FOMC) meeting are also expected to increase volatility in interest rates and stock prices.

Global stock markets have continued to rally supported by falling interest rates since the COVID-19 pandemic. Kim Hanjin, a researcher at KTB Investment & Securities, analyzed, "Looking only at developed country stock markets, the New York stock market, the source of liquidity supply, showed the highest sensitivity to interest rates, followed by Japan and Germany. Among U.S. stock markets, Nasdaq showed overwhelmingly higher price elasticity relative to interest rates, while the S&P 500 and Dow Jones indices were less responsive to interest rates compared to tech stocks."

Rising interest rates are expected to continue to weigh on stock prices for the time being. Researcher Kim said, "Ahead of the winter season, energy prices are unlikely to stabilize easily, and wage increases due to employment recovery will continue, heightening uncertainty about inflation and monetary tightening. Investors will try to reduce portfolio risk because they do not know how financial conditions will change for the time being, so markets that have benefited greatly from interest rate stability since April last year will face greater burdens on the opposite side at the early stage of this interest rate hike." Therefore, the burden from rising interest rates is expected to be greatest in the U.S. stock market overall, including Nasdaq, which has shown strong price elasticity due to interest rate stability, followed by the Eurozone and emerging markets.

Among Asian emerging markets, stock price gains due to falling interest rates have been largest in the order of India, Taiwan, Korea, and China. Assuming global interest rates continue to rise under other equal conditions, the negative impact of interest rates is expected to be greatest in these markets in that order. Researcher Kim noted, "India, in particular, is a crude oil importing country, so the burden is large," adding, "Still, the reason why global stock markets are expected to maintain a box range by somewhat overcoming inflationary pressures is that economic expansion still has enough room and monetary liquidity remains abundant."

The conditions for the KOSPI to re-enter a bull market include corporate earnings improvement and a shift to a weaker dollar. Researcher Kim explained, "The condition for the KOSPI to regain a bull market trend is that the global economy or corporate earnings improve further to overcome the burden of rising prices and interest rates," adding, "In particular, the sensitivity of stock prices to interest rates has shown a high correlation with the dollar so far." From April last year to recently, the dollar was weak during the interest rate stabilization phase. Although global stock markets are mostly similar, the opinion is that for the Korean stock market to rise in an interest rate hike phase, it must now break away from the low-interest-rate-dependent pattern so far. Researcher Kim added, "If inflation normalizes and corporate profits increase flexibly, and the dollar shifts to weakness, rising interest rates will no longer be a negative factor for emerging markets. This quarter will be a testing period to prepare for that."

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