Attention on Global Tightening Moves... Rising Expectations for Undervalued Korean Stock Market

Cautious Tightening Moves from Fed to ECB
Undervalued Korean Stock Market Compared to US Tech Stocks... "Price Merit Expected Centered on Large IT"

On the 15th (local time), a TV screen at the trading floor of the New York Stock Exchange in the United States showed Federal Reserve Chairman Jerome Powell holding a press conference after concluding the Federal Open Market Committee (FOMC) regular meeting. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The US Federal Reserve (Fed) and central banks around the world have begun to concretize their tightening policies. While monetary tightening will bring about volatility, it is also a factor that solidifies the downside of the stock market, so it is analyzed that sectors with objectively undervalued stocks should be selected.

On the 18th, Samsung Securities predicted that in the process of tightening becoming concrete in various countries, the domestic stock market will highlight such price advantages. It explained that as the strong trend of foreign investors favoring large-cap stocks continues, attention should be paid to sectors such as electric and electronics, finance, materials, and dividend stocks.

First, the Federal Open Market Committee (FOMC) results of the US Fed were evaluated as being within the range expected by the market. On the 15th (local time), after concluding the December FOMC regular meeting, the Fed strengthened its hawkish stance by revealing an accelerated tapering (asset purchase reduction) schedule compared to the initial forecast. Considering inflation progress and employment improvement, it announced plans to reduce purchases by $20 billion in Treasury bonds and $10 billion in mortgage-backed securities (MBS) respectively.

Seojeonghoon, a researcher at Samsung Securities, said, "The Fed did not want to act hastily given the variables of the economic recovery slowdown caused by the COVID-19 new variant 'Omicron' and the still pervasive inflationary pressures," adding, "The European Central Bank (ECB) also announced the end of the Pandemic Emergency Purchase Programme (PEPP) in March next year but temporarily increased the existing Asset Purchase Programme (APP), which had been proceeding on two tracks, to create a buffer zone."

Furthermore, despite the Bank of England's surprise rate hike, it chose to maintain quantitative easing, which is interpreted as central banks not wanting to become a source of instability themselves during periods of pronounced macroeconomic uncertainty. Researcher Seo analyzed, "Considering the very high level of inflation, although central banks' tightening measures have advanced compared to before, they can still be regarded as accommodative. The background for continued risk asset preference remains valid, and concerns about a global economic recession are still premature."

The cautious tightening approach by monetary authorities can be seen as a factor that solidifies the downside of the stock market. Additionally, if the possibility of China shifting to a stimulus policy emerges, investment sentiment toward the domestic stock market could further improve. However, it warned that the fact that monetary tightening, which had only been a concern so far, is now becoming concrete should not be overlooked.

Researcher Seo said, "Although central banks have taken a more moderate policy stance than expected, the reduction in liquidity supply and the subsequent interest rate hike trend will certainly change investors' attitudes," adding, "The increase in financial costs caused by interest rate hikes could exert profit-taking pressure on stocks that have risen so far."

Meanwhile, the overall domestic stock market is still considered relatively undervalued compared to US tech stocks. Assuming that price advantages will become an important buying condition as tightening becomes more visible, it is expected that the recent foreign buying trend may continue for some time. Researcher Seo said, "In particular, the electric and electronics sector centered on domestic semiconductors is expected to pass the bottom of the business cycle, and its valuation level is low compared to peer groups. Due to its scale characteristics, it can benefit from passive demand," adding, "The strong performance of these large IT companies will enhance the overall index momentum."

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