"Surviving the 'Strong Dollar Fear' Industries... 'Find Stocks with Margin Gains When Exchange Rates Rise 10%'"

[Asia Economy Reporter Lee Seon-ae] The securities industry is busy searching for sectors that can survive and benefit in the 'King Dollar Era.' During periods of rising exchange rates, foreign investors tend to sell domestic stocks due to concerns over foreign exchange losses, negatively impacting supply and demand and inevitably increasing index volatility. However, it is believed that sectors and stocks that have secured upward momentum during high exchange rate periods can generate profits.

According to the financial investment industry on the 19th, securities firms generally identified sectors with high export ratios such as automobiles, shipbuilding, clothing OEM (Original Equipment Manufacturer), biopharmaceutical contract development and manufacturing organizations (CDMO), and information technology (IT) as those that could benefit from high exchange rates. They also judged that if earnings improvement effects appear, it would be an optimal combination.

One of the representative sectors benefiting from exchange rate effects is the automobile industry. Hyundai Motor Company posted earnings in the second quarter that exceeded the consensus (average estimate by securities firms) by 30.5%, thanks to the exchange rate effect. Recently, with the rise in the won-dollar exchange rate, the third-quarter earnings estimates for Hyundai Motor and Kia have been continuously revised upward. Jinwoo Kim, a researcher at Korea Investment & Securities, said, "The third-quarter operating profits of Hyundai Motor and Kia are expected to exceed the consensus by 23% and 12%, respectively," adding, "Both companies are expected to break their record for the highest quarterly earnings set in the second quarter."

Researcher Donggil Noh of Shinhan Investment Corp also viewed the high exchange rate benefits for two sectors, including automobiles and shipbuilding, positively. He said, "When the exchange rate rises by 10%, margins for automobiles, auto parts, and shipbuilding have increased by 3.3 percentage points," adding, "Especially, the 12-month forward sales of automobiles and shipbuilding have increased by 25% and 52%, respectively, compared to early last year, and with the exchange rate effect added, the earnings improvement trend will be more pronounced."

Recently, clothing OEM has also emerged as a beneficiary of the exchange rate. In the first half of the year, the combined dollar sales of three OEM companies (Youngone Corporation, Hwasung Enterprise, Hansae Co., Ltd.) increased by 38%, but due to the exchange rate effect, the amount in Korean won rose by as much as 52%. OEM companies price their raw material costs, which depend on sales and imports, in dollars, but most costs, including wages, are paid in local Southeast Asian currencies where the factories are located. If the dollar remains strong and Southeast Asian local currencies weaken, the possibility of earnings improvement increases. Hakyeong Park, a researcher at Korea Investment & Securities, analyzed, "Clothing OEM is expected to exceed operating profit expectations in the third quarter due to the added variable of exchange rate increases during the peak season."

Biotech is also considered a sector benefiting from high exchange rates due to its large proportion of dollar-based sales. Jaekyung Park, a researcher at Hana Securities, stated, "Companies with a high proportion of dollar-based sales and low dollar exposure in costs such as raw materials and labor can benefit during periods of rising exchange rates." Among them, the securities industry advises paying attention to CDMO. Most CDMO contracts are made in dollars, and all factories are located in Korea, so labor costs and depreciation expenses are incurred in Korean won. Samsung Biologics is regarded as the most promising stock (top pick) in the sector. Researcher Park explained, "Among domestic pharmaceutical and biotech companies, Samsung Biologics is the most advantageous during periods of rising won-dollar exchange rates," adding, "Due to the nature of CDMO, raw material costs are reimbursed, so the exchange rate impact is minimal."

On the other hand, the representative sectors to avoid are aviation and food and beverage. Airlines have most of their aircraft lease liabilities denominated in foreign currency, and fuel costs, which constitute a large portion of operating expenses, are also paid in dollars, so rising exchange rates lead to increased earnings burdens. Although grain prices are expected to fall from the fourth quarter in the food and beverage sector, the rise in exchange rates offsets the downward effect, which is considered problematic.

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