"Exchange Rate J-Curve Effect... KOSPI Expected to Rise from Q4"

Foreign Investor Sentiment Weakens Due to Exchange Rate Rise
"However, Beneficial for Exports... Fundamentals Expected to Improve"
"KOSPI Rises 18 Months After Exchange Rate Increase"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] An analysis suggests that the KOSPI will rise from the fourth quarter of this year due to the "J-curve effect of the exchange rate," where the index increases as fundamentals improve (export growth) following a rise in the exchange rate.

On the 13th, Kang Hyun-ki, a researcher at DB Financial Investment, stated, "After the rise in the won-dollar exchange rate, the KOSPI has fully enjoyed the J-curve effect of the exchange rate."

The won-dollar exchange rate rose for six consecutive trading days starting August 31 and surpassed 1,380 won intraday on September 7. It was the first time in 13 years and 5 months since April 1, 2009 (high of 1,392.0 won), right after the foreign exchange crisis, that it exceeded 1,380 won.

The recent high exchange rate is a phenomenon caused by the U.S. Federal Reserve's aggressive tightening to defend against inflation (price increases), which has increased the value of the dollar. On the 13th, after the Chuseok holiday, the won-dollar exchange rate opened at 1,375.0 won, down 5.8 won from the previous trading day (1,380.8 won), but it remains at a high level.

Despite the U.S. inflation rate declining from its peak, a 75 basis point hike is expected at the September Federal Open Market Committee (FOMC) meeting, which is a factor driving the exchange rate higher. Generally, when the won-dollar exchange rate rises, foreign investors tend to exit the Korean stock market due to concerns over exchange losses. The KOSPI is once again approaching the 2,300-point level due to the impact of the rising exchange rate.

On the 13th, the KOSPI index opened at 2418.59, up 34.31 points (1.44%) from the previous trading day. Dealers are working in the Hana Bank dealing room in Euljiro, Seoul. Photo by Moon Honam munonam@

The "J-curve of the exchange rate" refers to the phenomenon where the KOSPI ultimately rises following an increase in the exchange rate, tracing a J-curve shape. When the currency value weakens (exchange rate rises), the trade balance improves with a time lag. As fundamentals improve accordingly, foreign investors tend to increase their preference for the country's overall stock market.

Researcher Kim said, "An increase in the exchange rate causes the KOSPI to fall initially but enhances export price competitiveness," adding, "It is important to remember that fundamentals improve with a time lag."

He emphasized, "In today's era, where the real purchasing power of consumers worldwide has declined, Korean goods, which have become cheaper due to exchange rate competitiveness, will become more attractive overseas," and "A high exchange rate forms the foundation for future fundamental improvements in the KOSPI."

He further analyzed, "The period when the KOSPI will rise due to the J-curve effect of the exchange rate is early in the fourth quarter of this year," and "Mathematically estimated, the exchange rate has led the KOSPI index by 18 months."

He added, "I recommend buying KOSPI stocks," especially noting, "The attractiveness of undervalued export stocks is increasing."

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