[Good Morning Stock Market] "Optimistic Outlooks Are a No-Go... Overheating Will Cool Down for a While"

Considering the Best-Case Scenario... Global Economic Rebound May Be Lower Than Expected

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] There are concerns that the global stock market's upward trend is relying too heavily on overly optimistic forecasts. Analysts warn that preparations are needed as the second wave possibility of COVID-19 and the slowdown in asset purchases by major advanced economies' central banks could result in a global economic rebound in the second half of the year that falls short of expectations.

◆ By Min Byung-gyu, Researcher at Yuanta Securities = After experiencing unprecedented volatility and panic in the second quarter, the market appears to have priced in the most optimistic scenario. It seems to assume the end of COVID-19, continuation of accommodative policies (low interest rates, asset purchases, fiscal policies), and subsequent normalization of the economy in the second half of the year, which appears to be a biased optimistic view. It is necessary to prepare for the possibility of a second wave of COVID-19, the rapid slowdown in asset purchases by major advanced economies' central banks, and the possibility that the global economic rebound in the second half may not be as strong as expected.

In particular, since it seems difficult for COVID-19 to be completely eradicated, the global economic rebound in the second half may be weaker than expected. Although various optimistic views have emerged following recent indicator rebounds, the consensus for this year's global Gross Domestic Product (GDP) market forecasts continues to be revised downward based on data. While the stock market recovery due to the easing of the COVID-19 situation is natural, new highs do not seem justified. The global stock market is expected to undergo a process of cooling off from overheating as achieving the best-case scenario faces difficulties for the time being.

As the global stock market recovery progresses significantly, future markets are expected to respond sensitively to indicators. A common trend of emerging markets' superiority has been confirmed in many recent indicators. The favorable trends in economic and earnings indicators are commonly found in countries with high dependence on trade with China, such as South Korea, Taiwan, and Australia, as well as in China, which was heavily affected by last year's trade disputes. Ultimately, this means that China's economy is important. Recent industrial indicators suggest that a favorable trend is likely to continue for the time being.

In advanced countries, a slowdown in the U.S. and relative strength in the Japanese stock market are expected. The work-from-home and untact (contactless) trends due to COVID-19 have immediately benefited companies like NVIDIA. It has also become an opportunity for companies to pursue mid- to long-term changes such as 'smart factories.' Japan, which has a unique competitive edge in the robotics industry, is expected to benefit. In fact, although orders in Japan's manufacturing sector have decreased due to COVID-19, orders for industrial robots are recovering. Representative robotics-related exchange-traded funds (ETFs) such as BOTZ and ROBO ETF are approaching new highs, and recent capital inflows have resumed.

◆ By Park Sang-hyun, Researcher at Hi Investment & Securities = U.S. economic indicators show coexistence of recovery expectations and concerns. Supporting Federal Reserve Chairman Jerome Powell's cautious stance on economic recovery, manufacturing real indicators and employment data raise concerns about the sharp rebound in sentiment-based indicators. In particular, although new weekly unemployment claims have been trending downward since early April, the rate of decrease compared to the previous week has slowed unexpectedly. This may indicate that the pace of economic normalization is slower than expected.

Concerns about a second wave of COVID-19 coexist with hopes for vaccine development. After easing movement restrictions, the possibility of a resurgence has emerged, especially in some U.S. states. Without vaccine or treatment development, the second wave of COVID-19 could threaten the normalization of the global economy.

Conflicts with China are also an important issue. It is suggested that U.S. President Donald Trump is unlikely to escalate conflicts with China ahead of the presidential election, as withdrawing the Phase 1 trade agreement could poison the current U.S. economic recovery. However, despite some easing of concerns about escalating U.S.-China tensions, the risk remains that President Trump could again heighten tensions with China at any time.

Although concerns about stock market overheating, such as the dot-com bubble risk, are rising, views on IT giant companies have not changed significantly. Not only Amazon but also companies symbolizing the digital economy and the Fourth Industrial Revolution?such as those in untact sectors, electric vehicles, and hydrogen vehicles?have seen more pronounced stock price increases. While bubble risks similar to the late 1990s to early 2000s dot-com bubble may be growing, COVID-19 acts as a catalyst accelerating the shift of the global economy and industrial paradigm toward the digital economy and the Fourth Industrial Revolution. This means it is not easy to judge the growth or rapid stock price rise of IT giants simply as a bubble. Corrections may occur, but the trend is expected to remain valid.