[Good Morning Stock Market] Domestic Stock Market Struggles Amid External Adversities... "Short-Term Recovery Difficult"

US Stock Market Reflects Stagflation Concerns Amid Soaring Commodity Prices
Exchange Rate Nearing 1200 Won, Negative Impact from Foreign Investor Flows

Rising International Oil, Iron Ore, Aluminum Prices
"Entering Winter Heating Season, Energy Price Increase Not Easy to Resolve"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Amid the energy crisis, soaring commodity prices due to supply chain disruptions, and tightening concerns from major global economies, South Korea's stock market, exchange rate, and bond market are all showing weakness. Securities experts predict that these negative factors will not be resolved in the short term. The domestic stock market is expected to struggle to rise, influenced by the decline in the U.S. stock market on the day.

Sangyoung Seo, Researcher at Mirae Asset Securities: “Domestic Stock Market to Reflect Stagflation and Exchange Rate Rise Concerns”

The U.S. stock market reflected stagflation concerns as high inflation, driven by soaring commodity prices amid ongoing global economic contraction, may last longer than the Federal Reserve (Fed) and market expectations. Last Friday, WTI (West Texas Intermediate) crude oil surpassed $80 intraday for the first time since November 2014, while prices of iron ore, lumber, cotton, and aluminum continued to soar due to China's power shortages.

Looking at major indices, the Dow Jones fell 0.72%, the S&P 500 dropped 0.69%, and the Nasdaq declined 0.64%. Even among individual stocks, sectors with significant cost increase concerns due to rising raw material prices continued to decline, while beneficiary sectors maintained strength.

Amid this, during the earnings season, companies are expected to reflect cost increases caused by high inflation. As of the 8th, 21 S&P 500 companies have reported earnings; among them, 15 mentioned supply chain issues, 14 cited labor shortages and costs, 11 referred to COVID-19 and logistics costs, and 10 pointed to risks from raw material prices.

Meanwhile, the Korean stock market is expected to open lower, considering that the U.S. market has factored stagflation concerns into stock prices. Although the Japanese and Hong Kong markets, which were closed the previous day, showed gains, these were due to domestic factors and are unlikely to provide upward momentum. The won-dollar exchange rate approaching 1,200 is also a burden. The exchange rate issue stems from ongoing power grid problems in China and concerns over global economic slowdown, which negatively affects foreign investor demand.

Sohyun Kim, Researcher at Daishin Securities: “Energy Price Rise Difficult to Resolve in Short Term”

International oil prices continue to rise. Crude oil reached $79.53 per barrel, marking a yearly high, while gasoline prices hit 236.62 cents per gallon, also a yearly peak. This increase is influenced not only by recovering oil demand due to economic recovery but also by increased demand for oil used in power generation and heating, replacing natural gas and coal. Meanwhile, OPEC+ announced at this month's meeting that it will maintain its existing plan to gradually reduce production cuts, heightening supply concerns.

Conversely, the upward trend in natural gas prices has somewhat eased. According to the Chicago Mercantile Exchange (CME), natural gas prices fell 11.73% to $6.31 per million BTU. This sharp price drop was influenced by news that Russian President Putin is prepared to respond to the energy crisis and may increase gas imports to Europe.

However, even if Europe's energy crisis eases due to increased natural gas exports, further downward adjustments in natural gas prices and limitations on increased oil demand are considered unlikely. Since no detailed information has been disclosed on how much Russia will further increase natural gas exports to Europe following President Putin's remarks, and no additional short-term spot contracts for European natural gas have been signed.

Additionally, energy inventory levels remain low, and the winter heating season has not yet begun. Furthermore, since the current situation is occurring amid a transition to renewable energy, energy supply instability and price issues are expected to be difficult to resolve in the short term.

Seungjin Shin, Researcher at Samsung Securities: “Time to Focus on Inflation, Reopen, and Eco-friendly Related Stocks”

Last week, the KOSPI showed weakness, falling below the 3,000 mark. Although foreign investors' net selling amounted to about 1 trillion won, which is not a large amount in absolute terms, the absence of clear buying entities caused the index to drop significantly. Additionally, stocks with high individual investor credit ratios experienced increased volatility due to forced selling triggered by price declines.

With the KOSPI decline, the 12-month forward price-to-earnings ratio (PER) reached around 10 times, making valuations attractive. However, it is necessary to consider that earnings forecasts may be adjusted due to external factors. Recent interest rate hikes and a strong dollar are unfavorable for market supply and demand. Ultimately, for investment, attention should be paid to companies that can hedge against inflation, those benefiting from the 'With COVID' phase reopening, and companies that can gain from global eco-friendly policies.

Considering the Northern Hemisphere entering winter and the prolonged global power shortage, energy prices are expected to remain high for some time. Given that U.S. monetary policy is in a tightening cycle, attention should be paid to cyclical sectors such as steel, refining, and raw materials, including companies like POSCO and S-Oil.

Regarding the 'With COVID' phase, benefits are expected to expand mainly in the movie and performance sectors. Companies like CJ ENM and J Contentree, which have strong content competitiveness and were significantly affected by COVID-19, are representative examples. In the eco-friendly theme, continued interest in electric vehicle and hydrogen energy companies is anticipated. Considering that eco-friendly companies are in the early stages of growth, it is recommended to increase their portfolio weight during this adjustment period.