[Good Morning Stock Market] "Challenging Market Environment... Foreigners' Net Selling Expected to Continue"

Domestic COVID-19 Spread and Concerns Over China’s Economic Slowdown
Won-Dollar Exchange Rate Expected to Rise...Foreigners’ Net Selling to Accelerate

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] The rise in the KRW-USD exchange rate is expected to further increase the scale of net selling by foreigners in the domestic stock market. Additionally, concerns about a slowdown in corporate earnings (peak-out) and an expanding preference for safe-haven assets suggest that it will be difficult for the index to show an upward trend.

Daejun Kim, Researcher at Korea Investment & Securities: “Foreigners show interest in healthcare and communication sectors”

The current market environment is not favorable enough to support a rapid rebound in the index. The global economic recovery is slowing due to the resurgence of COVID-19, and although corporate profits continue to grow, the base effect is weakening, leading to a forecast of lower growth rates than before. Market supply and demand conditions are also challenging.

The biggest burden is that foreigners are withdrawing from the Korean market. Foreigners have net sold 22 trillion KRW in the KOSPI this year, with 5 trillion KRW sold just last month. Considering that the Korean stock market has struggled under foreign supply and demand pressure, this is a concerning factor.

The acceleration of foreigners’ net selling is rooted in the rise of the KRW-USD exchange rate. In the second quarter alone, the KRW-USD exchange rate was stably maintained between 1,110 and 1,130 KRW. However, after the Federal Open Market Committee (FOMC) meeting in June, the exchange rate rose rapidly, intensifying the pressure for foreigners to sell.

The problem is that the exchange rate may remain higher than before going forward. Until last month, factors such as the Federal Reserve’s monetary policy normalization, the Biden administration’s stimulus measures, and rapid vaccine rollouts contributed to the dollar’s strength. Recently, domestic COVID-19 issues and China’s yuan depreciation appear to be influencing the situation. In China’s case, both manufacturing PMI and non-manufacturing PMI fell below expectations, increasing disappointment about the economy, which suggests that the Korean won, like the yuan, will be exposed to downward pressure.

In conclusion, since the KRW-USD exchange rate may remain higher than before, the pressure of foreigners’ net selling is unlikely to disappear. In such a case, a defensive approach toward the overall market is necessary, and it is advantageous to respond on a sector or individual stock basis rather than focusing on the entire index.

Looking at recent net buying intensity by sector, foreigners’ interest is concentrated in materials with solid earnings and healthcare and communication sectors with individual momentum. There are also many stocks where foreigners’ net buying and net selling have intensified at the individual stock level, so it is necessary to pay attention to future trends.

Sangyoung Seo, Researcher at Mirae Asset Securities: “Momentum of large tech stocks’ earnings has ended”

The U.S. stock market saw a large volume of sell-offs as major large tech companies’ earnings reports concluded with Amazon’s announcement, weakening further upward momentum. Additionally, liquidity-related issues, such as St. Louis Fed President Bullard advocating for early tapering (asset purchase reduction), have limited the reduction of the decline.

According to U.S. market research firm FactSet, 59% of S&P 500 companies have reported earnings, with an earnings surprise rate of 88%, and operating profits surged 85% year-over-year. Despite this strong performance, annual operating profits for this year are expected to increase by 40.7% compared to last year, but 2022 operating profits are forecasted to grow only 9.7%, showing a tendency to slow down.

Looking at quarterly earnings per share (EPS), Q2 EPS recorded 50.79, followed by 49.22 in Q3 and 51.08 in Q4, indicating no clear improvement speed. Ultimately, the debate over earnings peak-out is expected to continue, which may dampen investor sentiment.

Since this burden was already reflected in the Korean stock market last Friday, the decline is expected to be limited; however, ongoing concerns about economic peak-out and heightened preference for safe-haven assets remain burdensome. Worries about China’s economic slowdown are also likely to weaken investor sentiment. The July Korean export growth rate, which fell short of expectations (30.2%) at 29.6% year-over-year, is also expected to impact the stock market. On the positive side, semiconductor exports increased by 39.6% year-over-year, and all 15 major export items increased for two consecutive months. Considering these factors, the Korean stock market is expected to start higher but will likely remain cautious, awaiting individual stock issues and this week’s economic data results.