Will Seoul Bourse Hold amid Weak Yen and Strong Won?

Hyundai Motor Company announced on September 2 that it sold 381,429 cars in the global market in August to record a 29.1% growth in sales volume. Nevertheless, it said that the business conditions are expected to deteriorate down the road, as the growth of advanced and emerging economies is losing steam at the same time, and uncertainties increase due to currency rate fluctuations.

The Korean won is appreciating against the US dollar at a rapid pace with the weak yen trend continuing. Although the global economy is showing some signs of recovery, the exchange rate movement is likely to pose significant risks to large corporations and small firms alike if the trend goes on.

However, stock market experts are predicting that the appreciation of the won is the result of Korea’s robust economic fundamentals, and thus the currency risks will have a limited impact at best. 

Different Interpretations on Recent Drop in Won-Dollar Rate 

The won-dollar exchange rate fell by 2.6 won on September 3 to close at 1,097.9 won. “The drop can be attributed, among others, to Korea’s trade account surplus, the better-than-expected performance of Korean stocks as of late and the stabilization of the values of the Indian and Indonesian currencies,” said Jeon Min-kyu, research analyst at Korea Investment & Securities. He continued, “In the short-term, the won-dollar rate is likely to remain below 1,100 won.”

Foreign exchange experts are raising concerns as the psychological barrier of 1,100 won is broken again. “If the value of the won further appreciates amid the weak yen, the Korean economy could face significant challenges,” said one of them. 

The consensus is that the weak yen’s impact is limited for now, because it takes some time for the foreign exchange rate movement to begin to have its effect on the real economy. The thing is, more and more market analysts are mentioning that the time has come. 

Recently, the LG Economic Research Institute has said that the weak yen trend will begin to wield influence on Korea’s exports in the latter half of this year, as Japanese companies cut the prices of their main export products like automobiles and steel in the second quarter. In general, it is considered that there is a gap of five to seven months between such price adjustments and their reflection in export statistics. “If the weak yen trend sets in, Korean companies would go abroad for the sake of price competitiveness like their counterparts did, and then a long-term recession could hit the country,” it remarked. 

Meanwhile, some market insiders are arguing that the current strong won is unlike those seen in the past. “It seems that the recent stock price gain amid the appreciation of the won is what reflects the solid economic fundamentals of Korea,” Hyundai Securities researcher Bae Seong-yeong said, adding, “Things won’t get harder unless the Korean won plunges more against the US dollar.”

Some Companies Do Benefit from the Appreciation of Won 

Then, what will be the most promising investment targets for stock investors? For Korean exporters, the appreciation of the won is not good news, since it affects their price competitiveness. However, the story is different for those companies importing a large quantity of raw materials or depending on the number of outbound tourists for sales improvement. The examples include airlines, food and beverage manufacturers, oil refining companies, pharmaceutical firms, and steelmakers. 

For airlines, their operating expenses are more directly related to foreign currency exposure than sales are, and thus the strong won can have a positive effect on their business profits. Considering the huge liabilities and capital costs derived from the import of aircraft, the currency rate movement as of late can be a positive factor. 

In the case of food and beverage makers, raw material imports are larger than the amount of exports of finished goods, which means the appreciation of the local currency is supposed to result in a substantial improvement in operating profits. Therefore, the current trend can be the momentum the industry needs to pump up stock prices. The same analysis can be applied to pharmaceutical companies, which pay a large sum of royalties abroad for the use of patents. 

Oil refining companies and steelmakers have made capital investments, building on massive foreign debt. Accordingly, they can anticipate at least some decrease in liabilities and financial costs, though the currency rate movement could have mixed impact on their operating earnings. 

“The stock prices could move in different directions, depending on the company’s conditions such as the current stock price level, financial structure, and future business prospects,” said a securities market analyst, adding, “Investors would be well advised to look into such issues of each item before deciding on where to put in their money.”