China Evergrande Risk... Domestic Defensive Stocks vs. Affected Stocks

[Asia Economy Reporter Ji Yeon-jin] Concerns are growing that the default risk of Evergrande Group, China's second-largest real estate developer, will act as a negative factor for the domestic stock market. Experts predict that while the possibility of it escalating into a global financial crisis is low, stock prices in domestic industrial sectors such as machinery, shipbuilding, and construction, which are highly dependent on the Chinese real estate market, may decline.

As of 9 a.m. on the 23rd, the won-dollar exchange rate recorded a slight increase to 1,184 won compared to the previous day. During the recent Chuseok holiday period, the won-dollar exchange rate rose from 1,170 won to 1,190 won, and this won depreciation is considered a variable that could lead to a decline in the domestic stock market. Given that the KOSPI weekly average return was -2.6% during the period when the won-dollar exchange rate rose from 1,170 won to 1,190 won, there is also a forecast that if the won-dollar exchange rate rises to 1,190 won, the KOSPI could fall to 3,050.

In particular, it is expected that domestic industries closely correlated with the Chinese real estate sector will inevitably be hit. In the past, when the Chinese real estate sector's stock prices fell, the stock price declines in domestic machinery, shipbuilding, and construction sectors were relatively large, and negative effects are also expected in hotels and leisure sectors. According to Hana Financial Investment's calculation of the average returns by domestic industry sectors when the Hang Seng Real Estate Sector Index in Hong Kong fell compared to the previous month, machinery showed the largest decline at -3.5%, followed by hotel leisure, insurance, cosmetics, and apparel.

Lee Jae-man, a researcher at Hana Financial Investment, said, "During the period of won-dollar exchange rate increase, growth stocks in the domestic stock market showed relatively good performance," and added, "We believe that domestic secondary battery, pharmaceutical and bio, internet, and gaming sectors will continue to act as defensive stocks even in the current situation." He particularly recommended internet, gaming, software, and pharmaceutical sectors among domestic growth stocks, which have experienced relatively large declines compared to their yearly highs.