September Stock Market 'Shaken' by US Treasury Yields and Geopolitical Risks

The 10-year US Treasury yield has risen to 4.8%, acting like gravity on asset markets and continuously exerting downward pressure on global stock markets. The yield, which at one point sparked market anxiety with predictions of exceeding 5%, has now somewhat moderated to around 4.77%. Kwon Taek-jung, Deputy Branch Manager at Hana Securities, emphasized the negative impact of rising interest rates on the stock market, stating, “Interest rates are the gravity of the asset market.”

This rise in interest rates is a major factor hindering the expansion of stock market valuations. A high interest rate environment increases the rate at which companies' future profits are discounted to their present value, negatively affecting stock prices. Coupled with shrinking investor sentiment, rising financing costs also burden corporate activities, leading to increasing downward pressure across the entire stock market.

Recent interest rate movements are recognized as a critical variable that dictates the direction of the overall financial market, beyond mere numerical fluctuations. Unless interest rates stabilize, investor sentiment is unlikely to recover easily, which could delay the overall recovery of the stock market. Therefore, it is time for market participants to closely monitor interest rate trends and formulate investment strategies.

The chart for the US 10-year Treasury yield recently set a new high, putting downward pressure on the market. Since this yield directly determines the market's discount rate, its rise negatively impacts corporate valuations. Kwon Taek-jung, Deputy Branch Manager, explained that the “US 10-year Treasury yield” “determines our market's discount rate” and “has continuously created negative downward pressure.”

Currently, a bearish candlestick (red candle) on the chart indicates signs of short-term stabilization. Experts anticipate a meaningful upward trend in the stock market if interest rates stabilize to the middle of their trading range. However, the persistently high level of interest rates remains a major uncertainty factor for the market, requiring caution from investors.

Despite NVIDIA announcing strong earnings that surpassed both market guidance and consensus, its stock price surge lasted only one day. While the company achieved growth beyond expectations of double-digit expansion, it failed to maintain sustained stock price momentum as hoped. Kwon Taek-jung, Deputy Branch Manager, noted, “Earnings that exceeded guidance came out, and earnings that surpassed consensus came out again. Is double-digit growth possible? More than that growth came out. All of these things were good earnings that we expected or even better, but it was only good for one day.”

This phenomenon is attributed to the high-interest-rate environment acting as a constraint that hinders market valuation expansion. No matter how strong a company's earnings, a high-interest-rate environment tends to lead investors to undervalue the current worth of stocks. This happens because investors demand higher future expected returns, thereby capping the company's valuation.

With memory prices expected to continue rising, NVIDIA's earnings momentum remains valid. However, if the macroeconomic environment, particularly the trend of interest rate hikes, does not ease, even growth stocks like NVIDIA are likely to show limited movement in the short term. Investors need to consider both individual corporate earnings and changes in the overall interest rate environment.

Concerns are being raised that the US-China summit, scheduled for September 24th, coinciding with the first day of Korea's Chuseok holiday, could cause unexpected volatility in the domestic stock market. Kwon Taek-jung, Deputy Branch Manager, explained, “The US-China summit is scheduled for September 24th, which is the first day of our Chuseok holiday. Of course, local time would be evening, night.” He reminded investors of the risks of investing right before the holiday. Based on past precedents, there is a strong empirical belief among investors that the market is always unstable right before holidays.

The US-China summit is a major event that could heighten economic and diplomatic tensions between the two countries. Both the US and China are expected to engage in aggressive media tactics leading up to the summit, which could further increase market uncertainty. Investors need to carefully monitor the outcome of the summit and related news, approaching with caution.

In particular, with the long Chuseok holiday, domestic investors may have limited ability to respond to market changes, while foreign investors may increase selling pressure to liquidate their Korean stocks. This is highly likely to exacerbate downward pressure on the domestic stock market just before the holiday. Therefore, investors must review their portfolios and manage risks thoroughly before the holiday.

From a long-term perspective, changes in US-China relations significantly impact global supply chains and national economies. Thus, the content of this summit will be an important variable determining the market's direction after the Chuseok holiday. Investors must prepare for short-term volatility while also analyzing the long-term impact of changes in US-China relations.

Interest in the growth potential of the rare earths market is increasing as Lynas, one of the global rare earths suppliers, has made a private placement investment of KRW 53.4 billion in South Korea's JS Link. Kwon Taek-jung, Deputy Branch Manager, stated, “Lynas, one of the largest rare earths suppliers outside of China, recently invested KRW 53.4 billion in JS Link through a private placement.”

JS Link currently operates a 1-ton rare earths facility at its Yesan plant in Korea and plans to expand its global production capacity to 9,000 tons in the future. Lynas's investment is expected to be a crucial driver for JS Link's production capacity expansion and technological development. Rare earths are key materials in advanced industries such as electric vehicles and wind power, and their stable supply chain has become increasingly important amidst intensifying geopolitical risks.

JS Link's market capitalization, already at KRW 1.2 trillion, is considered to reflect its long-term growth plans. For a short-term investment strategy, setting Lynas' private placement acquisition price of KRW 32,000 as the lower support line is effective. Kwon Taek-jung, Deputy Branch Manager, suggested, “In the current phase, I consider KRW 32,000, Lynas's private placement acquisition price, as a slight lower bound, making it a stock for short-to-mid-term play when issues arise this month.” This analysis indicates a need for a short-term approach whenever rare earth-related issues come to the forefront this month.

Amidst the ongoing unstable situation surrounding Iran, concerns are also being raised about potential geopolitical risks involving China. Kwon Taek-jung, Deputy Branch Manager, commented, “I also think that geopolitical risks with China might be highlighted, in addition to the ongoing situation with Iran. This month could see military drills and such, so the second thing we should look at is defense stocks.” He urged attention to the defense sector.

As military drills and other China-related tensions are likely to escalate, defense stocks are being highlighted as a means to hedge against such geopolitical risks. Investors should consider defense stocks for building a stable portfolio during times of high uncertainty.

In the defense stock sector, Hanwha Aerospace and LIG Nex1 are highlighted as top picks. Both companies recorded excellent performance in the second quarter, increasing their investment appeal. Kwon Taek-jung, Deputy Branch Manager, emphasized, “I personally view Hanwha Aerospace and LIG Nex1 as top picks right now, and they are both companies that showed very strong earnings in the second quarter.”

Hanwha Aerospace is strengthening its order momentum in the global defense market, including the expansion of its K9 self-propelled howitzers into Western Europe. This is expected to contribute to stable revenue growth and improved profitability. LIG Nex1 is projected to greatly benefit from the US's need to replenish missile inventories. Analysts suggest that LIG Nex1's export opportunities will expand as the US government increases defense spending and actively acquires advanced weapons such as missiles.

In a situation where geopolitical risks are intensifying, defense stocks are likely to emerge as stable investment options. Especially Hanwha Aerospace and LIG Nex1, which possess both strong performance and order momentum, are identified as stocks investors should pay attention to at this time.

Despite September's market volatility, there is an optimistic outlook for a stock market recovery in October. This is due to expectations that the political environment before the US presidential election will be favorable for removing uncertainties. Kwon Taek-jung, Deputy Branch Manager, explained, “It's not good for Trump to have too much commotion before the midterm elections. So, from our perspective, if we endure this month and build a good position, we expect the stock market to be good for at least the month of October.”

After the Chuseok holiday, as major events like the US-China summit conclude, market uncertainties are expected to gradually dissipate. If these major variables are resolved, suppressed investor sentiment could recover and act as fuel for a stock price rebound. Therefore, investors might consider leveraging September's volatility as an opportunity to establish good positions.