[Practical Finance] Investment Strategies in the Era of King Dollar?

Dollar Betting Frenzy Seems Late
Shall We Look for Beneficiaries of King Dollar?

[Asia Economy Reporter Ji Yeon-jin] Kim Jae-jin (44), who started investing in stocks in the 2020 COVID-19 liquidity market, has turned his attention to various alternative investments, including equity-linked securities (ELS), as his securities account has been in the red this year. He discovered a short-term dollar arbitrage investment. Since the won-dollar exchange rate surpassed 1,300 won, Kim has been buying dollars. This is a so-called 'bul-tagi' (buying more at a price higher than the average purchase price) strategy, anticipating that the dollar value will rise further. He said, "Considering that the dollar, a safe asset, has risen in value during every economic crisis, I have to bet on the dollar's rise," adding, "My goal is to sell when the won-dollar exchange rate exceeds 1,400 won."

As the dollar value soars, dollar investment is gaining attention. The won-dollar exchange rate, which was around 1,200 won at the beginning of this year, is on track to surpass 1,400 won this month. The energy crisis triggered by Russia, which launched a war in Ukraine and cut off natural gas supplies to Europe, has raised concerns that it could lead the global economy into a recession, boosting the value of the safe-haven dollar. Recently released U.S. Consumer Price Index (CPI) data for August exceeded market expectations, leading to forecasts that the U.S. Federal Reserve (Fed) will implement even more aggressive tightening measures to curb high inflation, which could further drive up the dollar's value.

Some investors engage in short-term dollar arbitrage
'Currency exchange' is the most searched term on securities firms' MTS
U.S. Dollar Index Futures ETFs yield 40% return since the beginning of the year

◇ "Now is the time to sell dollars" = Like Kim, some investors have recently started buying dollars directly. Dollars can be purchased through banks' foreign currency deposits, currency exchange mobile applications (apps), or securities firm accounts.

It's easy to think of 'currency exchange,' which is essential when traveling abroad. In fact, 'currency exchange' was the most searched term on a securities firm's Mobile Trading System (MTS) recently. All three platforms share the common feature of allowing dollar storage while enabling arbitrage trading. Banks allow cash withdrawal of dollars, whereas securities firms, which offer relatively higher currency exchange fee discounts, do not allow cash withdrawals. Securities firms allow the purchased dollars to be used for buying U.S. stocks. Also, bank mobile currency exchange services have limits on amounts and frequency, allowing only small investments.

Dollar arbitrage trading typically involves buying dollars when their value has fallen and converting them back to won when the won-dollar exchange rate rises. For example, if you buy dollars when the won value per dollar is 1,100 won and sell when it rises to 1,200 won, you gain a 100 won profit. The advantage is that there is no tax on exchange gains, but a 1.5?2% currency exchange fee applies. However, most banks and securities firms offer about 90% discount on currency exchange fees, resulting in much lower fees of about 0.15?0.2%. Dollar deposits also pay interest.

However, experts advise reducing dollar holdings now that the dollar value has surged sharply. In fact, the dollar deposit balance of the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) was $56.79194 billion (about 78.6284 trillion won) on the 7th, down by $476.74 million (about 660 billion won) from $57.26838 billion last month. This indicates that dollars were sold as the won-dollar exchange rate surpassed the 1,350 won level.

Park Sang-hyun, author of "I Buy Dollars Instead of Stocks," wrote in his book about the timing of dollar purchases: "When the won-dollar exchange rate itself has fallen compared to before, yet the U.S. Dollar Index remains the same or even rises." The Dollar Index is an indicator that measures the average value of the U.S. dollar against the currencies of six major countries worldwide, with the euro accounting for 57.6%.

Beneficiaries in computer and optical equipment sectors with high export ratios
Margin increases by 3.3 percentage points with a 10% rise in exchange rate

◇ Should we look for beneficiaries of the strong dollar? = The most representative indirect investment in the dollar is exchange-traded funds (ETFs) that invest in the rising won-dollar exchange rate. According to the Korea Exchange, the ETFs with the highest returns in the past month were 'KOSEF U.S. Dollar Futures Leverage' (14.59%), 'TIGER U.S. Dollar Futures Leverage' (14.44%), and 'KODEX U.S. Dollar Futures Leverage' (14.37%). These ETFs are based on the 'U.S. Dollar Futures Index (F-USDKRW),' which reflects the price movements of the nearest month U.S. dollar futures traded on the Korea Exchange, with returns approaching 40% since the beginning of the year.

Investing in stocks that can benefit from the strong dollar is also worth considering. Typically, companies with high export ratios see improved profitability as the won-dollar exchange rate rises. According to an analysis by Shinhan Investment Corp., considering input-output tables, the industry expected to see the highest margin improvement from a rise in the won-dollar exchange rate is computer, electronics, and optical equipment. These sectors can expect a margin increase of 3.3 percentage points with a 10% rise in the exchange rate. Representative industries include semiconductors, displays, smartphones, TVs, and other IT-related sectors.

Transportation equipment also expects a margin improvement of 3.3 percentage points with a 10% rise in the exchange rate. This industry group includes automobiles, auto parts, and shipbuilding. Conversely, sectors that suffer margin deterioration from exchange rate increases include coal and petroleum products (mainly refining industries) and food and beverages. They experience margin declines of 2.2 percentage points and 0.5 percentage points, respectively, with a 10% rise in the exchange rate.