Fed's Interest Rate Freeze Possibility, Opportunity for Semiconductors

Currently, the voices of the hawks (hardliners) appear to be dominant within the U.S. Federal Reserve (Fed). This stance advocates for interest rate hikes based on strong growth and high inflation rates. Analyzing periods of hawkish and dovish (moderate) activity over past years, the current situation resembles times when hawks strongly pushed for rate hikes. The Fed continues to affirm its commitment to achieving its 2% inflation target and maintains its position on using interest rate policy to achieve this.

This is confirmed by the trimmed mean inflation index. Trimmed mean inflation, along with median inflation, is used as an indicator to show the trend of core inflation by removing base effects. If this indicator shows stability, the possibility of an interest rate freeze increases. Furthermore, if the Consumer Price Index (CPI) and Producer Price Index (PPI) maintain their current levels, the probability of an interest rate freeze is expected to rise further.

Concerns that the stock market will plummet if the U.S. raises interest rates may be a short-term view. Interest rate hikes can instead be interpreted as a sign of a robust U.S. economy. As the Governor of the Bank of Korea mentioned, 'I will prevent it while it can be prevented with a hoe,' proactive interest rate hikes may be a measure to prevent a greater crisis. Looking at a broader time series, periods of rising interest rates can also be an opportunity for the stock market, and if a crash occurs, it can even be used as an opportunity for bargain hunting.

These two indicators will determine the direction of interest rates, which will have a significant impact on the overall stock market. Additionally, Micron's earnings report, due in the fourth week of September, and Samsung Electronics' earnings report, due in early October, are expected to serve as important momentum for the domestic stock market, especially the semiconductor sector.

Memory semiconductors hold a very high proportion in the domestic stock market, accounting for over 50% of the total market capitalization. Therefore, the earnings announcements of major semiconductor companies such as Samsung Electronics and SK Hynix have a significant impact on the overall domestic stock market. Many investors hold shares in these companies, so market movements can be largely influenced by their earnings results. In particular, stock prices often rebound by announcing unexpected earnings when market expectations are low, which is why interest in the semiconductor sector is currently increasing.

The main reasons for the sharp decline in semiconductor stock prices in July were concerns about reduced capital expenditures (CAPEX) and supply and demand factors from leveraged exchange-traded funds (ETFs). However, these concerns are short-term factors, and the fundamental growth momentum of the semiconductor industry remains valid, according to analysis.

An analysis of operating profit margin data for major semiconductor companies, including Micron, Korean semiconductor companies, and Nvidia, shows that when operating profit margins are maintained at a high level, the companies' scale (absolute operating profit) grows, and stock prices tend to rise continuously. This implies that if a company's profit-generating ability remains strong, long-term stock price increases can be sustained despite market fluctuations. It is important not just for the profit margin to be high, but for that high profit margin to be consistently maintained.

However, these concerns can be viewed as excessive. Looking at Nvidia's past recovery from maximum drawdown (MDD), high operating profit margins prove a company's strong profit-generating power and provide a basis for full recovery and growth even after a temporary decline. Ultimately, robust operating profit margins resolve, rather than amplify, peak-out concerns.

The current period for Korean semiconductor companies can be compared to the downturns Nvidia experienced in the past. The key is that as long as operating profit margins remain robust, the stock prices of these companies can steadily rise like Nvidia's from a long-term investment perspective.

Foreign investors, who did not fully enjoy the domestic stock market's strong performance in the first half, are increasingly likely to return to the domestic market. Global investment banks such as Goldman Sachs are issuing positive assessments of the domestic market, which could serve as a basis for foreign investors to make purchasing decisions. When the current supply and demand gap is resolved, foreign investors are expected to re-emerge as key players in the domestic stock market.

After the decline in July, semiconductor stock prices have deviated from their previous upward trend line and are showing a somewhat sideways movement. This can be interpreted as a sign that stock prices are finding a stable trend rather than rapidly surging in the short term. Currently, the most important thing is to secure 'downside rigidity' of the stock price. Share buybacks are presented as a key basis for securing this downside rigidity. In particular, it is expected that the stock price floor will be supported by corporate share buybacks until mid-October.

Share buybacks have the effect of supporting and stabilizing the stock price floor, but they are unlikely to be a direct upward momentum to cause stock prices to surge. Corporations are legally unable to artificially push up stock prices by purchasing large quantities of their own shares at market price. Therefore, share buybacks focus on securing downside rigidity. For further stock price increases, a reaffirmation of strong corporate earnings and a change in investors' perception of the memory market are necessary.

The continuous leveling up of artificial intelligence (AI) models like ChatGPT and Astra will act as a key driver for memory semiconductor demand. As AI develops, more data processing and storage space will be needed. This will ultimately spread the perception that 'memory is very important, and many tokens (data units) are needed,' leading to the sustained growth of the memory semiconductor industry. Interest in AI, which was software-centric, is now shifting back to hardware, especially memory semiconductors.

In the current memory semiconductor market, the increase in price (P) is limited. This is because SK Hynix has secured long-term contracts with large customers like Nvidia, effectively capping price increases to some extent. In this situation, to drive stock price increases, an expansion in volume (Q) is essential rather than price. A gap in volume supply due to capital investment is expected to continue until this year. Institutional investors are currently adjusting their positions and observing, waiting for the timing of volume expansion.

Investment in memory semiconductors should be approached with a long-term view rather than a short-term one. From a long-term perspective, investment performance will be rewarded at a time when volume (Q) explodes significantly. The current long-term contract structure ensures that memory semiconductor prices (P), while not rising further, will not fall and will maintain their current level. This is expected to form the basis for stable profit generation when volume surges in the future.