[Good Morning Stock Market] US Credit Rating Outlook Downgrade... Could Be an Opportunity in the Market

Economic Recovery Trend from Various Stimulus and Financial Stability Measures
If Direction Remains Unchanged, Opportunity to Increase Stock Market Weight
Domestic Market Attractiveness Also UP Amid Dollar Weakness

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Credit rating agency 'Fitch' has downgraded the outlook for the United States' sovereign credit rating. Concerns are emerging that if the actual credit rating falls and the credit ratings of European countries also decline one after another, uncertainty and volatility in the global financial market will intensify. However, if the direction of recovery itself does not waver as governments around the world have poured out policies for economic stimulus and financial stability since the COVID-19 pandemic, it is analyzed that this could rather be seen as an opportunity to enter the stock market amid short-term volatility expansion.

◆ Kyungmin Lee, Researcher at Daishin Securities= On the 31st (local time), Fitch lowered the outlook for the United States' sovereign credit rating from 'stable' to 'negative.' While maintaining the US credit rating at 'AAA,' Fitch explained that the decision was made "considering the ongoing deterioration of public finances and the absence of credible fiscal consolidation plans." However, it forecasted that the economic contraction in the US would be less severe compared to other advanced countries.

The downgrade of the US sovereign credit rating outlook is likely to stimulate short-term volatility in the US and global financial markets. This is because the trauma from the shock experienced by the global financial markets after S&P's downgrade of the US credit rating outlook in April 2011 and the actual downgrade in August 2011 could trigger investor anxiety. Japan, which had its credit rating outlook downgraded earlier (on the 27th), experienced a 0.7% depreciation of the yen and a 4.18% drop in its stock market.

It is necessary to be cautious about the expansion of short-term volatility in the global financial markets and to pay attention to future credit rating issues. However, it is premature to overinterpret this. In fact, when Fitch lowered the US credit rating outlook on October 15, 2013, the global financial markets showed signs of short-term volatility expansion but soon continued the existing upward trend. The impact of credit rating outlook issues on the global financial markets is expected to be limited to short-term investment sentiment contraction and risk appetite retreat.

Going forward, it is important to watch whether S&P and Moody's will follow Fitch in downgrading the US credit rating outlook and whether an actual downgrade will be implemented. Also, attention should be paid to whether sovereign credit rating downgrades will follow in various countries, especially in Europe. In such a case, the expansion of uncertainty and volatility in the global financial markets due to increased pressure for dollar strength will be inevitable. The fundamental cause of the surge in global financial market volatility in the second half of 2011 was also in Europe. The Greek default, fiscal crises in major European countries, and credit rating downgrade issues led to a sharp rise in the dollar.

Currently, based on strong monetary, financial, and fiscal policies and the resumption of economic activities after COVID-19, the global economy is normalizing. If there are no problems with the direction of economic recovery and uncertainty variables do not significantly affect the recovery trend, short-term volatility expansion is an opportunity to increase exposure.

◆ Junghoon Seo, Researcher at Samsung Securities= As the relative attractiveness of the domestic stock market is highlighted, foreign buying is expected to continue under conditions of dollar weakness. The retreat of the Donald Trump effect is expected to ease the burden on the domestic stock market.

Despite President Trump sending a shocking message about postponing the election schedule, the market reaction was neutral. This is an example of his influence gradually diminishing. The Trump effect that had been reflected in the market will naturally decrease. The recent sharp decline in the dollar exchange rate is likely linked to the decline in President Trump's approval rating. The domestic stock market, which had suffered from the US-China dispute, will face a different situation than before.

In fact, the export-dependent domestic economy has been significantly influenced by the US-first policy line in recent years. If this trend is likely to retreat, the accumulated burden on the stock market could also be alleviated. Attention should be paid to the fact that the main export products of the domestic market are transforming into items such as semiconductors, batteries, and content. Along with this, dollar weakness is likely to reduce various costs and lead the real economy worldwide. The domestic stock market is already classified as a market with high sensitivity to the economic cycle.

If dollar weakness continues, foreign buying of the domestic stock market could also be extended. Looking at the domestic earnings results for the second quarter, the stock market's upward trend was not unusual. This is because the earnings improvement of sectors such as batteries, bio, internet, and games was evident. Since the fundamental improvement of leading stocks has been visibly confirmed, interest in these sectors is expected to rise again.