“Last Interest Rate Hike” Is a Real Warning Signal

While foreign, institutional, and individual investors are selling, other corporations buying over 1 trillion won in shares demonstrates SK Hynix's strong influence.

Park Jong-yeon, Department Head of Hanwha Investment & Securities' PLUS Asset Strategy Team, stated, “I think the recent market strength is due to share buybacks. Foreigners, institutions, and individuals are all selling, but other corporations are buying over 1 trillion won. That has to be attributed to SK Hynix's power.” Foreign and institutional investors tend to maintain their stake in SK Hynix at around 4.8% to 4.9%, showing a tendency to sell when share buybacks occur. However, a pattern of foreign re-purchases is observed after the share cancellation is completed.

This suggests that market volatility is converging to a single level.

Team Leader Park Jong-yeon explained, “The V-KOSPI is currently 46. I think it was 90 when I first met the anchor. So it's half. It's not showing up now. Market volatility is converging to one level anyway.” He assessed that the market has entered a stable phase, citing the absence of drastic volatility limiting measures like circuit breakers or sidecars.

Due to these differences, market-specific strategies for dealing with interest rate volatility must vary.

Team Leader Park Jong-yeon analyzed, “The Bank of Korea sees our economy as good enough to raise interest rates twice.”

This is because the actual growth rate is expected to be higher than Korea's potential growth rate of 1.8%. The Bank of Korea believes the economy is in good shape, surpassing its potential growth rate, and is focused on price stability through interest rate hikes.

In particular, the trend of big tech companies' capital expenditure (CAPEX) consensus will serve as an important indicator. The flow of export data and big tech CAPEX is expected to play a decisive role in estimating the number of future interest rate hikes.

Some hawkish remarks from Fed officials express their principled commitment to curbing inflation, but the market's expectation for an actual interest rate hike still lacks a clear direction.

If AI investment can boost productivity, it could be a key variable in curbing inflationary pressures. Team Leader Park Jong-yeon explained, “If AI boosts productivity, it means inflation won't rise as much as people fear. If investments are happening that don't boost productivity, then that continuously increases inflationary pressure.”

If AI investment doesn't actually improve productivity, it could instead exacerbate inflationary pressures. According to research from the Fed's task force, there are encouraging assessments of AI's potential for productivity gains.

This reflects expectations that AI can contribute to price stability by improving overall economic efficiency beyond simple technological innovation.

The improved cost-effectiveness of AI models themselves can lower the burden of AI adoption for companies and ultimately serve as empirical evidence leading to increased productivity.

Team Leader Park Jong-yeon analyzed that the stock market has driven the current interest rate increases. He explained, “I think the stock market drove it up. The stock market, in any case, is pulling it up, and behind the stock market's rise is AI CAPEX. If there's CAPEX, there's investment pressure, leading to funding pressure, and that's causing issues with US corporate bond yields, issuance, and rising rates, and even pulling up Treasury yields.”

The rise in the stock market led to expectations of expanded capital expenditure (CAPEX) related to AI. These large-scale investments increased funding pressure on companies, triggering a chain reaction that led to rising US corporate bond yields and then rising Treasury yields.

The current market is characterized by earnings momentum rather than liquidity-driven gains, with AI CAPEX-related investments being the primary cause of rising interest rates.

He advised, “When you are in the middle of an interest rate hike cycle, you should only look at earnings.”

In particular, as U.S. companies are showing better earnings trends than Korean companies, it may be effective to build a portfolio centered on companies expected to show improved performance.

The past top-down approach (macroeconomic indicator-centric) was suitable for emerging markets or markets with a high proportion of traditional industries like telecommunications and banking, but its influence is now diminishing as the fundamentals of the domestic market change. With the increasing weight of consumer goods and technology companies, discussions about individual corporate earnings and technological innovation have become more important than macro indicators.

Team Leader Park Jong-yeon explained, “Rather than talking about macro, discussing semiconductors and technology is now more important because our market's fundamental basis has changed from before.” He emphasized the need for an earnings-based approach tailored to the changing fundamentals of the Korean economy.

Team Leader Park Jong-yeon emphasized, “In September, rather than the FOMC, watching whether the BOJ raises interest rates is the way to reduce volatility from a macro perspective.”

Japan has continued its weak yen strategy by expanding large-scale fiscal spending. If the BOJ does not raise interest rates, there is a risk of increased volatility in the yen-dollar exchange rate, which could significantly impact global financial markets.

Therefore, investors should pay closer attention to the BOJ's monetary policy decision in addition to the FOMC meeting results.

Team Leader Park Jong-yeon commented, “For semiconductors, I think we need to see if there's more room for improvement, because the consensus is already high.”

For further appreciation in semiconductor stocks, an upward revision of capital expenditure (CAPEX) guidance by big tech companies is essential. Currently, big tech companies are in a phase of generating profits from existing infrastructure investments, and new large-scale investments have not yet been confirmed.

This reflects the market's perception that big tech companies have grown through large-scale investments and are now transitioning into a full-fledged profit-generation cycle based on their invested assets.

Team Leader Park Jong-yeon explained, “Big tech has invested heavily, and while they were investing, semiconductors did well. Now, people are expecting big tech to truly make money from their investments.” In other words, while big tech investments previously drove semiconductor demand, big tech is now entering a period of realizing returns on those investments.

Therefore, investors need to adjust their portfolios by appropriately diversifying between semiconductor and big tech weights, and a strategic approach considering each sector's current position and future growth drivers is crucial.

Team Leader Park Jong-yeon commented, “Their output is small compared to what Korea earns. You don't need to worry about that yet.”, pointing out that Chinese manufacturers' absolute production scale remains small.

Furthermore, the fact that these companies have stated they have no intention of engaging in a low-price offensive is another reason for the low short-term threat. However, from a long-term perspective, it is necessary to continuously prepare for the growth potential and threats of the Chinese memory market by taking a longer time horizon.

This is an extension of the U.S.'s long-standing demand for reshoring. Team Leader Park Jong-yeon stated, “Semiconductor tariffs, simply put, mean building facilities in the U.S.”, suggesting that it is a policy to encourage expansion of production facilities within the U.S.

As major domestic semiconductor companies have already announced and are implementing large-scale investment plans in the U.S., the key issue will be whether actual investments are made rather than tariffs. Such investments can meet U.S. demands for supply chain stabilization while also providing domestic companies with opportunities to secure new production bases.

He said, “When you're doing sector rotation, I think the best way to respond is to look at the worst-performing sectors and think about how they can improve.”

Currently, it is necessary to focus on sectors where tangible results are confirmed, such as bio (license out) and batteries (ESS contracts), and the semiconductor sector, which performed the worst in August, is also worth watching again. Investors should carefully analyze the potential for earnings improvement and the potential of each sector to seize sector rotation opportunities.

The current portfolio strategy is to maintain a 50:50 ratio of Korean to U.S. stocks to prepare for volatility. Team Leader Park Jong-yeon stated, “This is just continuous maintenance. We keep adjusting to a 50:50 ratio as we invest,” emphasizing the principle of diversified investment to respond to market uncertainties.

The exchange rate may show temporary strength due to dollar conversion issues for corporate tax payments, but overall, it is expected to rise higher than its current level. This is because global economic conditions and changes in monetary policies of various central banks are expected to have a complex effect on the exchange rate.