[Weekly Market Outlook] US-China Friction Resurges... A Week Full of Variables

Escalation of US-China Conflict Including Closure of Houston Chinese Consulate
Next Week's KOSPI Expected Range 2170~2250
Focus on External Factors Such as Additional US Fiscal Policies

[Asia Economy Reporter Oh Ju-yeon] Global stock markets experienced increased volatility due to issues such as US-China tensions and the possibility of delayed economic recovery caused by the resurgence of COVID-19. The domestic stock market is also analyzed to be facing uncertainty.

According to the securities industry on the 26th, NH Investment & Securities projected the KOSPI expected range for the fourth week of July to be 2170?2250. Factors driving the rise include expectations for COVID-19 vaccine development, additional US economic stimulus measures, and the global stock market’s earnings momentum bottoming out, while the possibility of renewed US-China tensions is cited as a downside risk.

[Image source=AP Yonhap News]

On the 24th (local time), the US Dow Jones Industrial Average closed at 26,469.89, down 0.68% from the previous trading day; the S&P 500 fell 0.62% to 3,215.63; and the Nasdaq dropped 0.94% to 10,363.18. It is analyzed that US-China tensions are also impacting the stock markets.

Following the US administration’s decision to close the Chinese consulate in Houston, China retaliated by deciding to close the US consulate in Chengdu, escalating US-China conflicts. Until last week, the global stock market did not react sensitively to the news of the Houston Chinese consulate closure, but it remains to be seen whether US-China tensions will spread to trade and economic levels. Notably, the domestic stock market is experiencing increasing valuation pressure, with the KOSPI surpassing the 2200 mark and the KOSDAQ reaching 800.

On the other hand, the current index recovery is based on expectations for earnings improvement in 2021. The price-to-earnings ratio (PER) based on the expected 2021 earnings per share (EPS) is 11.2 times, indicating room for further gains. There is also analysis that the market could respond to future external improvement factors such as additional US fiscal policies.

Labor Gil, a researcher at NH Investment & Securities, said, "The additional US stimulus package, which is under discussion including the extension of unemployment benefits, is favorable for the stock market," and added, "The domestic stock market is expected to continue reacting sensitively to individual stocks based on the results of second-quarter earnings announcements while awaiting news from the US."

Researcher Roh explained, "The delayed recovery of earnings momentum in the domestic stock market strengthens and prolongs the concentration on growth stocks," and added, "Recently, the domestic stock market has been undergoing a rotation in returns among growth stocks, while some value stocks with low valuation burdens have also attracted attention." He continued, "It is effective to establish an investment strategy focused on growth stocks while also paying attention to some value stocks such as automobiles."

Moon Nam-jung, a researcher at Daishin Securities, predicted that expectations for monetary and fiscal policies could increase the stock market’s resilience.

Researcher Moon said, "Although the policy rate is expected to remain unchanged at the July 28?29 FOMC meeting, it will be an opportunity to discuss the future policy framework, instilling market expectations for new policies close to economic stimulus, such as maintaining zero interest rates, extending long-term duration, and allowing inflation to exceed 2%."

From the fiscal policy perspective, he anticipated that the US House of Representatives could rapidly pass the fifth economic stimulus package by the end of July.

Researcher Moon forecasted, "As the necessity for additional policies to continue economic recovery grows, the gap between the Democratic and Republican parties will narrow as the end of July approaches, increasing upward pressure on the stock market based on policy expectations."