[Good Morning Stock Market] Domestic Stock Market Requires Sector Rotation Response Strategy

[Image source=Yonhap News]

[Asia Economy Reporter Ji-hwan Park] Market experts have diagnosed that the domestic stock market is likely to experience a rotation trading phase for the time being. They advise focusing on finding stocks that will benefit from rotation movements. In particular, with upcoming events such as the National People's Congress of China and the U.S. Federal Open Market Committee (FOMC) meeting this month, along with liquidity absorption by the People's Bank of China, and additional stimulus measures in the U.S., market volatility may increase, according to analysis.

◆Sangyoung Seo, Kiwoom Securities Researcher= The domestic stock market surged sharply the previous day due to stabilization of U.S. Treasury yields but closed with reduced gains following remarks by Guo Suching, Chairman of the Banking and Insurance Regulatory Commission (BIRC) of China, which raised concerns about tightening. Notably, sectors such as secondary batteries and semiconductors showed strong performance, reflecting sensitivity to factors affecting the U.S. stock market the day before. The 3.10% decline in the Philadelphia Semiconductor Index in the U.S. market is a burden for the Korean stock market. The drop in electric vehicle sales in China is also expected to weigh on related companies.

However, the decline in new COVID-19 infections and deaths due to vaccination efforts worldwide, including in the U.S., is positive. This raises the possibility of an expanded export growth trend for Korea amid expectations of economic normalization in various countries. In particular, the number of elderly deaths in the U.S. has decreased from 7,000 per week in January to the 2,000 range currently, which supports the Congressional Budget Office’s projection of economic normalization around mid-year.

In the domestic stock market, if selling pressure emerges, rebound buying could also increase. The economic normalization issue may stimulate tightening concerns, which had been a factor in the previous day’s market pullback. The domestic market is expected to start with a decline of around 1%, followed by rapid sector rotation without a leading sector due to increased financial market volatility.

◆Byunghyun Jo, Yuanta Securities Researcher= On the 4th, China’s largest political event, the Two Sessions (Lianghui), will begin. Since this is the first year of the 14th Five-Year Plan, it is important to pay attention not only to the annual economic policy direction but also to medium-term issues. Regarding the U.S. FOMC meeting on the 18th, there is growing expectation for additional policy support as a counterbalance to recent rapid interest rate hikes. Expansion of asset purchases or introduction of operation twist are among the anticipated measures. While additional policy actions cannot be ruled out, caution is needed as uncertainty may be reignited if outcomes do not meet market expectations. Attention should also be paid to the dot plot and other indicators, as any content that raises concerns about interest rates could provoke sensitive market reactions.

◆Hyunki Chae, Cape Investment & Securities Researcher= With global stock markets generally surpassing pre-COVID-19 highs, the speed and sensitivity of interest rate increases have become higher than in previous years, contributing to increased volatility. Recently, the U.S. 10-year Treasury yield approached the 1.6% level and is currently exploring direction in the mid-1.4% range. Financial markets will undergo an adjustment process to the current interest rate levels, but tension regarding rates is likely to continue at least until the U.S. FOMC meeting this month. Federal Reserve Chair Powell is expected to reaffirm the Fed’s commitment to market stabilization by dispelling early tapering concerns and signaling prolonged ultra-low interest rates before the blackout period.

◆Seolhwa Choi, Korea Investment & Securities Researcher= The Chinese Two Sessions (Political Consultative Conference and National People's Congress) will open on the 4th. Historically, stock markets have trended upward following the Two Sessions in years when the Five-Year Plan is announced. However, this year, with emphasis on policy normalization and risk management, attention should be paid to growth industries that the government is proactively fostering rather than the index itself. Amid U.S.-China tensions, China will focus on securing supply chain safety through domestic technology development, expanding renewable energy investments for carbon neutrality, and boosting domestic demand via new infrastructure such as 5G.