Cracks in the Three Highs... Should I Buy More Stocks?

High Inflation, High Interest Rates, High Exchange Rates
Inflationary Pressure Factors Weaken
Supportive Factors Like Decrease in Short Selling
Advice to Secure Cash Rather Than Chase Buys

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Junho] Cracks are appearing in the external environmental factors leading to high inflation, high interest rates, and high exchange rates. Signals such as the decline in the U.S. Consumer Price Index (CPI) for October and China easing its zero-COVID policy have been detected. In the domestic stock market, variables affecting the direction of the market, such as a decrease in the proportion of short selling, are emerging, leading to expectations of a stock price rise. However, the securities industry advises that in this situation, securing cash rather than chasing purchases is a wiser choice.

Cracks in the Three Highs

BNK Securities' analysis of the US inflation graph based on the US CPI announcement

According to the Korea Exchange on the 14th, the KOSPI has steadily risen except for October 3rd and 10th based on closing prices. The KOSPI, which closed at 2293.61 at the end of last month, recorded 2483.16 on the 11th, raising interest in whether it will surpass the 2500 mark for the first time since August 18.

The situation does not seem too bad. First, the buying sentiment of foreign investors, who play a key role in domestic stock market rises, continues. Foreign investors net purchased 3.226 trillion KRW from the 1st to the 11th of this month. Considering that they net purchased 3.237 trillion KRW in October, it is analyzed that buying sentiment has strengthened.

The biggest factor behind this change is the crack in the pressures on the stock market such as high inflation, high interest rates, and high exchange rates. First, the U.S. October CPI (expected 7.9%, announced 7.7%) fell short of expectations. As the steep rise in prices eased, the U.S. 10-year Treasury yield also declined, and the market is forecasting that the U.S., which had taken a fourth giant step (raising the benchmark interest rate by 0.75 percentage points), will find it difficult to continue high-intensity tightening. The expectation that high-intensity tightening may be difficult is leading to a weaker dollar.

There is also great anticipation due to China, known as the world's factory, easing its stringent COVID-19 prevention measures. On the 11th, the Chinese State Council shortened quarantine regulations for overseas arrivals and close contacts from ‘7+3’ (7 days facility quarantine + 3 days self-quarantine) to ‘5+3’ (5 days facility quarantine + 3 days self-quarantine). Additionally, it withdrew the temporary suspension of flights with confirmed cases and announced 20 other measures. The market interprets these measures as part of economic stimulus efforts.

A venue to gauge solutions to the U.S.-China conflict was also arranged. U.S. President Joe Biden and Chinese President Xi Jinping will meet for the first time on the afternoon of the 14th (local time) in Bali, Indonesia, where the G20 summit is held, for a summit meeting. President Xi secured a third term at last month’s party congress, and President Biden recently secured a stable foundation to pursue foreign policy for the next two years as the Democratic Party maintained majority control of the Senate in the midterm elections, making this meeting significant.

Stock Market Variables Emerging One After Another

Short Selling Trends Analyzed by Hana Securities

Domestically, the decrease in the proportion of short selling transactions is notable. As of the close on the 9th, short selling transaction value was 528.6 billion KRW, accounting for about 3.52% of total transaction value. This is significantly below the average of 4.4% since May last year (when the short selling ban due to COVID-19 was lifted).

Shin Seungjin, a researcher at Samsung Securities, said, "This week, we plan to focus on stocks that have fallen excessively," adding, "Seasonally, short sellers tend to reduce short selling towards the end of the year because they must pay interest and dividends to lenders, and when the market phase changes as recently, the desire for book closing inevitably increases."

For a market turnaround, a change in sentiment and an increase in profits of KOSPI-listed companies are important, and positive outlooks are emerging here as well. Currently, the 12-month expected earnings per share (EPS) growth rate for the KOSPI is in negative territory. However, one indicator that can confirm a reversal in KOSPI profit growth is the U.S. ISM manufacturing index, which is expected to improve this month.

Lee Jaeman, a researcher at Hana Securities, said, "This week, the November New York manufacturing index (correlation coefficient with ISM manufacturing index since 2007: 0.74) and the Philadelphia Fed business outlook index (0.83) will be announced. The November outlook for these two indicators is expected to be -6.0p (compared to October’s New York manufacturing index of -9.1p and Philadelphia outlook index of -8.7p), showing improvement from the previous month," adding, "if these two indicators rise compared to the previous month as expected, the U.S. ISM manufacturing index for November (50.2p in October) is also likely to increase compared to the previous month."

Chasing Purchases Is a No-Go

Daishin Securities' Future Stock Market Outlook

However, even in this situation, the securities industry advises that it is wiser to view this as a time to secure cash rather than chase purchases.

Han Ji-young, a researcher at Kiwoom Securities, analyzed, "The KOSPI surged more than 5% last week on good news reflecting changes in U.S. conditions and is now on the verge of entering 2500. The won-dollar exchange rate also plunged more than 80 won in five trading days, creating a positive atmosphere in the domestic stock and foreign exchange markets." However, she added, "The won’s strength against other currencies was steep last week, and the stock market rise was relatively rapid. This week, it is necessary to prepare for the possibility of profit-taking due to this speed burden."

Lee Kyungmin, a researcher at Daishin Securities, forecasted, "This week, U.S. and Chinese real economy indicators will be released. For China, yuan weakness and a rebound in the won-dollar exchange rate are expected due to economic slowdown or deterioration. For the U.S., as overall economic slowdown becomes visible, it is expected to show characteristics of a bear market with negative earnings." Accordingly, he added, "We recommend minimizing chasing purchases and maintaining the view of reducing stock holdings and increasing cash holdings during rebounds."

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