[Good Morning Stock Market] Focus on Key Economic Indicators... Growth Stocks Rebound and Cyclical Stocks Rally

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[Asia Economy Reporter Lee Seon-ae] This week, close attention should be paid to major U.S. economic indicators and speeches by Federal Reserve (Fed) officials. It is expected to be a week spent seeking direction while monitoring inflation indicators. This week, the Consumer Price Index, Producer Price Index, and retail sales data will be released. If inflation indicators exceed expectations, concerns about inflation may resurface. Fed officials are also scheduled to give a series of speeches this week. However, most officials agree that it is not yet time to discuss tapering the Fed's asset purchase program.

◆ Cha Hyun-gi, Researcher at Cape Investment & Securities = The domestic stock market can be summarized with two keywords: the possibility of a rebound in growth stocks and the continued rise of cyclical stocks. The expected weekly KOSPI range is between 3130 and 3250. Factors expected to drive gains include the possibility of a delayed tapering discussion and remarks from Fed officials. A factor expected to cause declines is a higher-than-expected Consumer Price Index.

Overall, while first-quarter earnings showed strong performance, strength continues mainly in cyclical sectors such as steel and banking, whereas growth sectors are expected to remain flat. Remarks by Treasury Secretary Yellen and others have limited the upside for growth sectors due to concerns about tapering. If tapering discussions resume, the U.S. 10-year Treasury yield could surge, and growth sectors may face corrections. Last week, weak April employment data temporarily eased tapering concerns, which will act as a positive factor for growth sectors next week. However, if the economic recovery continues, tapering discussions are expected to take place within this year, so concerns about growth sectors will likely remain, and the short-term upward trend in cyclical sectors is expected to continue.

Meanwhile, foreign investors have been net sellers for eight consecutive days. Some express concerns that foreign net selling may continue, starting with the resumption of short selling. In fact, since the 3rd, foreigners have accounted for more than 80% of the total short selling volume. However, the overall short selling volume is decreasing. On the 3rd, the KOSPI short selling trading volume was 829.9 billion KRW, but it decreased to 397.8 billion KRW on the 7th. Ultimately, the stock market decline is a temporary effect of the resumption of short selling. The influence of short selling may weaken as short selling trading volume decreases in the future.

◆ Seo Jeong-hoon, Researcher at Samsung Securities = Recently, the strong performance of cyclical stocks is likely to maintain their leadership in the stock market going forward. This is supported not only by the financial environment of rising interest rates but also by an unexpected revival in the manufacturing sector. In fact, the recent rise in commodity prices is better explained by real demand rather than exchange rates or interest rates. After the pandemic, major countries have focused fiscal spending on manufacturing, such as infrastructure investment,

leading to numerous tangible investments. Additionally, from masks to semiconductors, the importance of production capacity has increased, continuously driving companies to expand their facilities. Furthermore, the sectors with sharply rising profit forecasts recently are traditional cyclical sectors such as steel, metals, chemicals, and energy.

From both price and value perspectives, the attractiveness of cyclical stocks cannot be denied. In fact, the main reason for the recent correction in technology growth stocks is valuation pressure. Their growth outlook has not significantly changed. However, due to rising interest rates, it has become harder to assign generous valuations to their growth potential. Moreover, if nearby cyclical stocks are generating visible profit growth, the appeal of growth stocks tends to diminish. On the other hand, many domestic cyclical stocks are trading below a PBR of 1. Due to prolonged neglect, they are still far from their historical highs. Comparing the types of growth stocks and their long-term relative performance, there is ample room for further rotation.

The biggest challenge in investing in cyclical stocks is unfamiliarity. Since entering the 21st century, interest in manufacturing has steadily declined, and intangible assets are currently valued much higher than tangible assets. However, it is necessary to respond keenly to the numbers. Higher interest rates than before clearly reflect a recovery in the real economy. This indicates a positive macro environment for cyclical stocks and is also favorable from a value stock style perspective. Considering that major economies have not fully resumed economic activities and deferred consumer demand has not been resolved, the dominance of cyclical stocks is likely to continue for some time.