[King Dollar's Bombardment] "Exchange Rate Surging Due to Foreign Exchange and Financial Crisis Differs" KOSPI Collapse... Check Selling Sectors

Exchange Rate Hits 5-Day High, Drops Below 1400 Won "Prolonged Strong Dollar"
Unlike the Past, Rapid Exchange Rate Surge "Profitability Issues Require Industry-Specific Strategies"

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] It is truly the era of the 'King Dollar' (strong US dollar). The won-dollar exchange rate has surpassed the 1,370 won level for the first time in 13 years and 5 months since the financial crisis, hitting new highs for five consecutive trading days. Entering the 1,400 won mark is only a matter of time, and the possibility of reaching the 1,500 won level cannot be ruled out, fueling concerns about the KOSPI breaking below its previous low (2,300.34 as of the close on July 4) and triggering crisis theories. However, some argue that since this situation differs fundamentally from the two previous sharp exchange rate surges during the financial and foreign exchange crises, it is wiser to approach the market conservatively and develop sector-specific strategies rather than responding with wholesale selling.

◆'King Dollar Era'... KOSPI Previous Low and Bottom 2050 Crisis Theory

According to the Korea Exchange on the 7th, the KOSPI closed at 2,410.02, up 0.26% from the previous day, barely holding the 2,400 level. Foreign investors, who had been net buyers last month, have shown a selling bias for four consecutive trading days this month amid the strong dollar trend, causing the KOSPI to lose upward momentum. On the 5th, it closed down 0.24% at 2,403.68. Although the KOSPI rose to 2,424.77 during the morning session, it turned downward in the afternoon, falling to 2,392.63 intraday. This was the first time in about a month since July 27 that it dipped below the 2,400 mark intraday. The ultra-strong dollar value has once again hampered the stock market.

Lee Kyung-min, a researcher at Daishin Securities, said, "On the 6th, the KOSPI showed strength to hold the 2,400 level but continues to experience unstable fluctuations," adding, "It is time to pay attention to exchange rate changes."

On the 6th, in the Seoul foreign exchange market, the won-dollar exchange rate closed at 1,371.7 won per dollar, up 0.3 won from the previous day. The closing price is the highest level in 13 years and 5 months since April 1, 2009 (1,379.5 won) during the financial crisis. The exchange rate surged intraday to 1,377 won, setting new highs for five consecutive trading days. The surge is driven by the King Dollar. Since the US Federal Reserve (Fed) took a giant step (raising the benchmark interest rate by 0.75 percentage points) in June, it has continued a tightening stance, pushing the dollar's value higher daily. The dollar index, which shows the dollar's value against six major currencies, has surpassed the 110 mark for the first time in over 20 years, maintaining the strong dollar phenomenon. With major events ahead such as the European Central Bank (ECB) interest rate hike decision, Fed Chair Jerome Powell's speech, and the simultaneous expiration of futures and options, volatility is bound to increase. Especially after the Jackson Hole meeting confirmed the long-term strong dollar trend, there are forecasts that the KOSPI could fall near its previous low by the end of the year.

SK Securities expects the KOSPI to hold its downside at the previous low level. Daishin Securities is also among the conservative outlooks, forecasting the true bottom of the KOSPI around the end of this year or the first quarter of next year. The overall environment is deteriorating, with corporate profits declining in a 'profit recession' and signs of foreign investor outflows due to the sharp rise in the exchange rate. Daishin Securities estimates the true bottom of the KOSPI at 2,050, a level that breaks the previous low, calculated considering the change rates of the US Institute for Supply Management (ISM) manufacturing index and earnings per share (EPS) forecast changes.

Park Sang-hyun, a researcher at Hi Investment & Securities, said, "The possibility of the won-dollar exchange rate reaching 1,500 won cannot be ruled out," adding, "If the preference for the dollar accelerates further, concerns about capital outflows (including foreign investors) within the market will increase." He continued, "Beyond concerns about the exchange rate level, the problem lies in factors that could hamper the economic growth cycle, such as inflation and stagflation."

[Image source=Yonhap News]

◆Exchange Rate Surge Different from the Past 'No Benefit in Market Sell-Off'... Sector-Specific Response Strategies Needed

Although concerns about panic selling arise due to deteriorating investor sentiment, the securities industry advises that it is time to develop sector-specific response strategies rather than engaging in unproductive panic selling.

There have been two periods when the won-dollar exchange rate was higher than now: during the 1997-1998 foreign exchange crisis and the 2007-2009 financial crisis. Both were related to systemic risks. KB Securities researcher Ha In-hwan said, "There is a difference between the past and current won-dollar exchange rate increases (won depreciation)," explaining, "In the past, it was a matter of safety (soundness), whereas now it is a matter of profitability (export sluggishness), meaning that the problem cannot be resolved quickly through policy measures." In other words, it is difficult for the exchange rate to decrease in the short term. He added, "From a stock investment perspective, one must consider whether to sell the entire market or take a conservative view and respond by sector," emphasizing, "If it were a safety issue, one should prepare for a broad market decline, but since it is a profitability issue, sector-specific response strategies are necessary."

By estimating the short-term impact by sector through the difference between export ratios and imported intermediate goods ratios and changes in operating profit margins, sectors exceeding the manufacturing average such as machinery and equipment, computers, electronic and optical devices, and electrical equipment (IT), transportation equipment, chemical products, and electrical equipment (IT) are positive. Considering the long-term impact by sector through export price adjustment capacity and changes in operating profit margins, chemical products are expected to be positive, exceeding the manufacturing average. Given political risks (such as between the US and China, Taiwan and China), caution is advised in the semiconductor (IT) sector.

It is also advised to pay attention to sectors with high US export ratios, which are expected to benefit. Among sectors with significantly increased US export ratios this year compared to the past five years are auto parts and secondary batteries. Over the past five years, the export ratios to China and the US for the auto parts sector were 10.9% and 27.4%, respectively. However, this changed to 5.7% and 34.7% this year. For the secondary battery sector, the export ratios to China and the US over the past five years were 14.5% and 18.9%, respectively, but this year, the China ratio dropped sharply to 6.7%, while the US ratio nearly doubled to 38%. Shin Jung-ho, a researcher at Ebest Investment & Securities, said, "While a rising exchange rate can reduce the upward momentum of the domestic stock market, it can be a positive factor for companies with high US export ratios," adding, "Among sectors with high US export ratios, companies with strong operating profit forecasts will likely see export benefits outweigh the burden of imported raw material costs due to the strong dollar."