[King Dollar's Bombardment] Fallen KOSPI "Different from Foreign Exchange and Financial Crises"... Immediate Review of Sell-off Sectors (Comprehensive)

On the 7th, the price broke through 1,380 won after hitting new six-day highs during trading... Approaching 1,400 won
KOSPI falls below 2,375... Sector impacts vary, "Portfolio review needed"

[Asia Economy Reporter Lee Seon-ae] It is truly the era of the ‘King Dollar’ (strong US dollar). The won-dollar exchange rate surpassed the 1,380 won level for the first time in 13 years and 5 months since the financial crisis, continuously hitting new highs for six consecutive trading days during the session. 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 (closing at 2,300.34 on July 4) and triggering crisis theories. However, some argue that since this situation is fundamentally different from the two previous cases of rapid 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 across the market.

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

According to the Korea Exchange on the 7th, the KOSPI fell below the 2,375 level at around 10:15 a.m. The ultra-strong dollar value weighed down the stock market. Ji-young Han, a researcher at Kiwoom Securities, said, "The weak performance is expected to continue, influenced by the global dollar strength and rising US interest rates, which affect the weakness of developed countries." Around 9 a.m. that day in the Seoul foreign exchange market, the won-dollar exchange rate surpassed 1,380 won. The exchange rate exceeding 1,380 won was last seen on April 1, 2009 (high of 1,392.0 won), during the financial crisis, 13 years and 5 months ago. The surge in the exchange rate 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, the tightening atmosphere has continued, pushing the dollar value higher day by day. The dollar index, which shows the value of the dollar against six major currencies, has surpassed the 110 mark for the first time in over 20 years, sustaining the strong dollar phenomenon. With major events 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 approaching, volatility is bound to increase.

In particular, with the long-term strong dollar stance confirmed at the Jackson Hole meeting, 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 views, forecasting that the true bottom of the KOSPI will come around the end of this year or the first quarter of next year. The overall environment is deteriorating, with corporate profits entering a ‘profit recession’ and signs of foreign investor outflows due to the rapid 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 predicted changes in the US Institute for Supply Management (ISM) manufacturing index and earnings per share (EPS) forecast changes.

Sang-hyun Park, 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]

◆Rapid Exchange Rate Surge Different from the Past: ‘No Benefit in Market-wide Selling’... Sector-specific Response Strategies Needed

Although there are concerns about panic selling due to deteriorating investor sentiment, securities firms advise 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. Hain-hwan Ha, a researcher at KB Securities, said, "There is a difference between the past and current won-dollar exchange rate increases (won depreciation). In the past, it was a matter of safety (soundness), whereas now it is a matter of profitability (export sluggishness), which means 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. If it is a safety issue, one should prepare for a broad market decline, but if it is a profitability issue, sector-specific response strategies are necessary."

By estimating short-term sectoral impacts through differences in export ratios and intermediate goods import ratios, as well as changes in operating profit margins, sectors outperforming the manufacturing average include machinery and equipment, computers, electronic and optical devices, electrical equipment (IT), transportation equipment, chemical products, and electrical equipment (IT), which are positive. Considering long-term sectoral impacts through export price adjustment capacity and operating profit margin changes, chemical products are expected to be positive, outperforming the manufacturing average. Given political risks (such as between the US and China, and 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. Sectors with significantly increased US export ratios this year compared to the past five years include auto parts and secondary batteries. Over the past five years, the auto parts sector’s export ratios to China and the US were 10.9% and 27.4%, respectively. However, this changed to 5.7% and 34.7% this year. The secondary battery sector’s export ratios to China and the US were 14.5% and 18.9%, respectively, over the past five years. But this year, the China ratio dropped sharply to 6.7%, while the US ratio nearly doubled to 38%. Jungho Shin, a researcher at eBest Investment & Securities, said, "While a rising exchange rate may 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 are likely to benefit more from export effects than they suffer from the burden of imported raw material costs due to the strong dollar."