Rate Shock: Will It Sink the Korean Stock Market?

In a rate-hike period, the usual setup is that beneficiary stocks rise and losers fall. This time, however, that pattern broke, and tech stocks rose even more.

Representative Lee Hwan-jin pointed out that many individual investors bought chip supply-chain stocks near their peaks. He named 'Senter' as a representative stock that people chased at high prices and got burned on.

Views that the yield is still too high sit alongside views that it is at a peak and trending down.

More than oil, the bigger worry had been a breach of 5% on the 10-year Treasury yield. But when the yield passed 5% in US markets, the Nasdaq's drop was smaller than expected, so a sense of relief formed.

Since the 2000s, the gap between the 10-year Treasury yield and the policy rate has averaged about 1.24 percentage points. If the policy rate rises to around 3.75%, the implied gap works out to 5.0%, meaning the 5.0% that had been the object of fear has become the average 10-year-to-policy-rate spread since the 2000s. For this reason, some argue the 'new normal' has changed. The expiry of US options and futures contracts, which sharply reduced speculative trading, was also cited as a factor pushing rates lower.

As US options and futures expiries passed, the 10-year Treasury yield began to fall, and speculative trading shrank considerably after the rate hikes. The judgment is that it is not a clearly upward trend from 5.0%.

If buybacks proceed more actively in short-term bonds, yields could come down from the level of concern. However, Lee Hwan-jin believes a potential bomb still remains. The explanation is that the domestic stock market is in a stage of adapting to and overcoming the rate environment, and that further stability can be assessed depending on how the buybacks proceed.

WTI has dropped below $90 but is hovering around $89, which is still considered high.

Oil above $100 is a burden. The explanation is that when oil rises, consumption slows, and the resulting economic slowdown works through to weigh broadly on stocks.

Whether the Strait of Hormuz or the Red Sea is blocked is cited as the key variable for oil. The recent oil spike was caused by overland routes being blocked on the Middle East side, pushing oil above $100.

More recently, negotiation news and the partial reopening of oil-field routes that had been blocked by attacks have brought oil down into the $80s and to $89.

Views on continued rate hikes are split: one holds that further hikes are unavoidable, while another holds that since hikes are happening because of the oil surge, they could stop if oil falls. The strength of the view that consecutive hikes are unavoidable signals how strong it is.

Conversely, some argue that since rates are rising now because of the oil surge, they may not be raised further if oil declines. The two readings stand in tight opposition.

The point was raised as evidence that tech stocks could keep rising despite the rate-hike environment. The assessment is that unless hikes are extremely aggressive and consecutive, tech stocks can withstand them.

This leads into a discussion of sector expansion and stock-selection strategy.

Market forecasts for both the FOMC rate hike and the BOJ rate hike were essentially wrong. The BOJ did raise rates, and its remarks were not hawkish, but concern about further hikes remains.

In the past, when the BOJ raised rates, the yen carry trade unwound and stock markets were affected; recently, the structure has changed so that the crypto market takes the direct hit. People said a yen rate hike would collapse the crypto market, but crypto has actually climbed very strongly recently.

Short-term funds moved from negative rates up to 1.2%, so urgent short-term money appears to have already been partly unwound during the transition. Medium-term funds came in still carrying the rate differential, so they have no reason to unwind in a hurry. If the BOJ hikes more aggressively over the long run, medium- to long-term funds may gradually exit, but there will not be an urgent phase like early last year, and because some of it is already priced in, medium-term money is unlikely to leave in large amounts.

The explanation is that if the stock had not suffered a big drop in June and July, supply-chain stocks would have been the better bet.

After the drops in June and July, both Samsung Electronics and SK Hynix faced price pressure, and many individual investors bought supply-chain stocks near short-term peaks, so quite a few people who followed in got stuck.

The suggestion is a workable strategy of buying Samsung-SK Hynix at 70% and supply-chain stocks at 30% to hold for the medium to long term, or treating supply-chain stocks as short-term trades to get in and out quickly. Those who bought in alongside the argument that supply-chain stocks look good after seeing the duo are often stuck and struggling in the short term. Front-end and back-end process stocks, and IT components epitomized by Samsung Electro-Mechanics, are not that cheap either.

The diagnosis is that this is not a very easy environment to invest in. It is described as a market that calls for trading and for staggered, gradual entry.

The premise is that there is certainly no single correct answer. This leads to the conclusion that a strategy suited to the mood is needed.

GPT6 Astra and Meta Muse drew a response, and there was talk that agentic AI requires a lot of CPUs.

Looking at the recent US AI net-buying, power equipment ranked first, memory chips second, and CPUs came in after hyperscalers. A caveat was added that what one expects may differ from reality.

Representative Lee Hwan-jin said this AI momentum "came in last," and judged that while one can match CPU weight within tech stocks, it is hard to hold only that.

He accepted the logic that as AI moves from training to inference, CPUs become more important in the inference domain than AI chips that quickly perform simple calculations on large volumes of data. However, he said that apart from AMD, it does not seem likely that strong evidence will form on how much position CPUs will take in AI chips.

The focus keeps returning to the fact that supply-chain stocks are not cheap. CPU growth is also correct, but if so, one could look at large US-listed names like AMD.

For supply-chain stocks, the conclusion is that one needs to pick the good from the bad, or avoid chasing at too high a level.

The underlying understanding is that US tech stocks pushing ahead despite rate hikes itself signals momentum forming around semiconductors, so looking for stocks in that orbit is more promising.

It is true that bank and insurance stocks have held up well so far in the rate-hike environment. However, among holders, a question was raised about whether to sell them to move into semiconductors, or to keep holding them because rates are rising.

Representative Lee Hwan-jin also weighed bank stocks. Looking at the US sector moves on the day of the US rate hike, bank stocks plunged while tech stocks surged. The assessment is that this was not a textbook rate-hike pattern.

The reason cited for the US bank-stock selloff was an issue with investment-banking trading fees tied to third-quarter results, but the trend has not been good since then either.

It was repeatedly pointed out that financial stocks are not cheap. For Bank of America, a figure of a fourfold rise from the bottom was cited as evidence.

Typically, financial stocks should be cheap early in a rate-hike cycle, but now they have quadrupled, and Korean bank stocks also rose sharply after a re-rating issue last year. The assessment is that prices formed near the bottom at the start of the rate-hike period are now mostly at their peaks.

The suggestion is that during the rate-hike period it is not bad to hold, but while there is a need to take profits, one should lower expectations and buying intensity compared with before. Looking at Bank of America and KB Financial charts, the advice is to note that even at the start of the rate-hike cycle, neither stock's price is low.

Stocks with strong momentum and strong price action are the first choice, but entertainment was named as a representative sector where people chased prices and got burned. The assessment is that entertainment's share-price drop is excessive relative to its fundamentals.

It is clearly cheap, with the price falling further than fundamentals justify, which draws attention. Fundamentals are not that bad either, and some improvement is expected after December.

Technically, the judgment is that one cannot buy right at this level. The advice is to keep an eye on entertainment but wait for a low to form, looking for a better price rather than buying right now.