[Weekly Market Outlook] Economic Recovery vs. COVID-19 Resurgence... Growing Caution Ahead of the US Presidential Election

[Asia Economy Reporter Oh Ju-yeon] With the U.S. presidential election just over a week away, the domestic stock market is expected to show limited fluctuations during the last week of October (26-30), caught between expectations for economic recovery after the election and the recent resurgence of negative factors related to COVID-19. In particular, as volatility increases ahead of the election, it is analyzed that attention should be paid more to differentiation among stocks rather than the overall index direction.

On the 25th, NH Investment & Securities projected the KOSPI range for the fourth week of October to be between 2300 and 2400. Optimism about COVID-19 vaccine development and the possibility of a Democratic presidential victory were cited as factors supporting the market, while the spread of COVID-19 in the U.S. and Europe was pointed out as a downside risk.

Researcher Kim Young-hwan of NH Investment & Securities said, "There is a growing opinion in the U.S. financial sector that the Democratic candidate will win the presidential election," adding, "The prevailing view is that the increase in government spending due to stimulus measures and infrastructure investment will outweigh the revenue increase from tax hikes." The possibility of a Democratic victory is also linked to a weaker dollar, which is a positive factor for non-dollar assets.

The won-dollar exchange rate is expected to fluctuate between 1,128 and 1,145 won. Researcher Kim stated, "Ahead of the U.S. presidential election in early November, Democratic candidate Joe Biden's approval ratings are leading, and the probability of the Democrats controlling the Senate has surged by 11 percentage points since August," diagnosing, "The so-called 'Blue Wave' expectations have expanded the strength of Biden-beneficiary currencies such as the Mexican peso, Chinese yuan, and Canadian dollar."

Hana Financial Investment set the expected KOSPI range for next week at 2320 to 2410. It explained that political uncertainty remains as the gap in approval ratings between U.S. President Donald Trump and Biden is gradually narrowing in battleground states. The won-dollar exchange rate is also a variable. Won appreciation can lower import prices, positively influencing domestic demand recovery, and may induce foreign investors' buy calls aiming for exchange gains. However, if won appreciation proceeds too rapidly, it could negatively affect export companies' profits, making the 'speed' a key factor.

Researcher Lee Jae-sun of Hana Financial Investment said, "The current won appreciation has a limited impact on overall earnings estimates," adding, "If the won appreciation is unlikely to proceed rapidly, the exchange rate could serve as a catalyst for foreign capital inflows after the uncertainty of the U.S. election is resolved. Looking at foreign net purchases by exchange rate range since 2013, the largest net purchases by foreigners occurred in the 1110-1120 won range."

He continued, "For export-dependent sectors such as semiconductors, home appliances, machinery, and automobiles, improved technology and quality competitiveness compared to the past can help overcome profitability deterioration," and forecasted, "In material industries like power, steel, and petrochemicals, which heavily import raw materials and intermediate goods, even if profits decline somewhat, the drop in import prices is expected to largely offset this."

Meanwhile, major events scheduled for next week include the Bank of Korea's announcement of the third-quarter domestic gross domestic product (GDP) on the 27th, the U.S. Conference Board Consumer Confidence Index (27th), U.S. third-quarter GDP (29th), the European Central Bank monetary policy meeting (29th), and Eurozone GDP (30th).