[Click eStock] "Trump Reelection in Mind... Focus on Defense, Food & Beverage, and Utility Sectors"

Defense Strategy Needed Considering Further Decline
"Need to Look at Low Beta, High ROE Sectors"

As U.S. President Joe Biden abruptly withdrew from the Democratic presidential race, securities analysts have suggested that investors should focus on sectors such as defense, food and beverage, and utilities, "keeping in mind the possibility of former President Donald Trump's re-election."

[Image source=Yonhap News]

On the 22nd, Kim Dae-jun, a researcher at Korea Investment & Securities, said, "Generally, the stock market tends to experience increased volatility just before the U.S. presidential election, and we are currently in that phase. A defensive approach to the market seems necessary for the time being."

Last week, the U.S. stock market was sluggish, and the Korean stock market, which shows a high correlation with the U.S. market, followed a similar trend. The KOSPI fell more than 2% over the week, marking its worst performance since the third week of April when the won-dollar exchange rate reached the 1,400 won level. The "Trump trade" (strengthening of assets related to Trump) gained momentum following the attack on former President Trump, influencing the sudden market changes.

The second-quarter earnings season will soon be in full swing, but the Trump trade is expected to gain strength over the next three months leading up to the U.S. presidential election. Researcher Kim noted, "Last week in the U.S., traditional leading sectors such as information technology (IT) and communication experienced significant declines, but sectors that could be seen as beneficiaries of the Republican Party, such as energy, finance, and industrials, performed well. The same was true for Korea. Specifically, defense, construction, shipbuilding, and other industrials, as well as defensive sectors like telecommunications, food and beverage, and healthcare, showed good performance."

He added, "Coincidentally, the trend of sector differentiation is expected to continue," and predicted, "With 106 days left until the U.S. presidential election, former President Trump's statements, as he gains momentum, are likely to influence sectoral performance." He further advised, "Although a new candidate may emerge following President Biden's decision not to seek re-election, the circumstances suggest that it will be very difficult for the Democratic Party to stop former President Trump's momentum. For now, responding to the market with Trump's re-election in mind will help protect returns."

In terms of strategy, he recommended sectors with low correlation to index price fluctuations and industries whose return on equity (ROE) exceeds their cost of equity (COE). Researcher Kim said, "Defense, food and beverage, utilities, telecommunications, and insurance can be highlighted," adding, "It is also important to examine whether these sectors can maintain high profitability based on solid earnings."

He also stated, "Meanwhile, as the KOSPI has been rapidly declining recently, it is necessary to keep the downside open. The current index level corresponds to a 12-month trailing price-to-book ratio (PBR) of 1, where market value equals book value. If additional downward pressure occurs from here, it is not impossible to see 2,650 points, which corresponds to a 12-month forward price-to-earnings ratio (PER) of 9."

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