A Different Surge in Exchange Rates Compared to Past Two Instances... Is There a Way Out Amid KOSPI's Risk of Breaking Previous Lows?

SK Securities and Daishin Securities "Approach KOSPI Conservatively, Possibility of Breaking Previous Low"
Unprecedented Rapid Exchange Rate Surge "Short-term Stabilization Difficult, Need to Find Beneficiary Sectors"

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] As the won-dollar exchange rate soared to the 1,370 won level for the first time in 13 years and 5 months, causing the KOSPI to fall below the 2,400 mark during the session, concerns have arisen that it could drop to the previous low point (2,300.34 as of the close on July 4). Amid ongoing investment advice to establish sector-specific response strategies rather than focusing solely on the index, voices are growing louder that the sharp rise in the exchange rate necessitates a more detailed examination of sectoral impacts. Reflecting on the two past instances of rapid exchange rate surges, it is considered wiser to take a conservative approach to the market overall and develop sector-specific strategies rather than responding with a blanket sell-off.

◆KOSPI Previous Low Point Collapse Risk Theory: 'Strong Dollar & Earnings Recession'

According to the Korea Exchange on the 6th, the KOSPI closed at 2,403.68, down 0.24% from the previous day, barely holding the 2,400 level. The KOSPI rose to 2,424.77 during the morning session but turned downward in the afternoon, falling to 2,392.63 intraday. This was the first time in about a month since July 27 that it dipped below 2,400 during trading hours. The ultra-strong dollar value has been a drag on the stock market.

With the dollar index surpassing 110 for the first time in over 20 years, the strong dollar phenomenon continues. Volatility is bound to increase as major events such as the European Central Bank (ECB) interest rate hike decision, Federal Reserve Chair Jerome Powell’s speech, and the simultaneous expiration of futures and options approach. In particular, the Jackson Hole meeting confirmed the long-term trend of a strong dollar, leading to cautious forecasts that the KOSPI could fall near the previous low point by the end of the year.

SK Securities expects the KOSPI to hold its downside at the previous low level. Daishin Securities is also among the conservative outlooks, forecasting the true bottom of the KOSPI to come around the end of this year or the first quarter of next year. Considering the predicted changes in the U.S. Institute for Supply Management (ISM) manufacturing index and earnings per share (EPS) forecast changes, the calculated KOSPI bottom that breaks the previous low is 2,050. Lee Kyung-min, a researcher at Daishin Securities, said, "We previously thought that companies excluding semiconductors had decent earnings, but now even those excluding semiconductors are uncertain," emphasizing the need for a conservative approach during an earnings recession phase.

◆Futile Panic Selling... Need for Sector-Specific Response Strategies

Although concerns about panic selling arise as investor sentiment worsens, securities firms advise establishing sector-specific response strategies rather than engaging in unproductive panic selling.

There have been two periods when the won-dollar exchange rate was higher than now: during the 1997-1998 Asian financial crisis and the 2007-2009 global financial crisis. Both were linked to systemic risks. Ha In-hwan, a researcher at KB Securities, noted, "There is a difference between past and current won-dollar exchange rate increases (won depreciation). In the past, it was a matter of safety (soundness), whereas now it is a profitability issue (export sluggishness), meaning that the problem cannot be resolved quickly through policy measures." In other words, it is difficult for the exchange rate to decline in the short term. He added, "From a stock investment perspective, one must consider whether to sell off the entire market or take a conservative view and respond by sector. If it is a safety issue, one should prepare for a broad market decline, but if it is a profitability issue, sector-specific strategies are necessary."

By assessing the difference between export ratios and imported intermediate goods ratios and changes in operating profit margins, sectors expected to be positively affected in the short term, exceeding the manufacturing average, include machinery and equipment, computers, electronic and optical equipment, electrical equipment (IT), transportation equipment, chemical products, and electrical equipment (IT). Considering long-term sectoral impacts through export price adjustment capacity and operating profit margin changes, chemical products are expected to perform positively above the manufacturing average. Given political risks (such as between the U.S. and China, Taiwan and China), caution is advised in the semiconductor (IT) sector.

Sectors with a high proportion of U.S. exports are also expected to benefit and warrant attention. Among sectors with significantly increased U.S. export ratios this year compared to the past five years are auto parts and secondary batteries. Over the past five years, the auto parts sector’s export ratios to China and the U.S. were 10.9% and 27.4%, respectively. However, this shifted to 5.7% and 34.7% this year. The secondary battery sector had similar export ratios to China and the U.S. over the past five years at 14.5% and 18.9%, respectively, but this year, the China ratio dropped sharply to 6.7%, while the U.S. ratio nearly doubled to 38%. Shin Jung-ho, a researcher at Ebest Investment & Securities, said, "A rising exchange rate may reduce the upward momentum of the domestic stock market but can be a positive factor for companies with high U.S. export ratios," adding, "Among sectors with high U.S. export ratios, companies with strong operating profit forecasts are likely to see export benefits outweigh the burden of import raw material costs caused by a strong dollar."

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