On the 4th, Lee Jae-myung's presidential term began. As political instability that had persisted since the end of last year was resolved and a new government was launched, the Korea Composite Stock Price Index (KOSPI) surpassed the 2770 level, setting a new high. However, the large wall set up across the sea remains unchanged. Exports are declining due to the 'tariff sword' wielded by U.S. President Donald Trump, indicating that it is difficult to remain optimistic about the stock market in this environment.

Considering these two significant events that will greatly impact the stock market—the launch of the new government and the ongoing repercussions of the U.S. tariff war—how should investors react? Experts advise that investing in domestic consumption-related sectors might be a viable approach.

On April 2, 2023 (local time), President Donald Trump announces the mutual tariff rates of major trading partners at the White House. /Courtesy of AFP Yonhap News

The launch of the new government is a big event for the stock market. Regardless of fiscal soundness, expectations for index growth are increasing, and it could be a good opportunity to find beneficiaries. Given that President Lee Jae-myung declared during the presidential campaign plans to open an era of 'KOSPI 5000', including investments in artificial intelligence (AI) and advanced industries, as well as expanded support for the K-defense industry and content, it is expected that related beneficiaries will attract attention according to the policy implementation of the Lee Jae-myung administration.

However, one cannot be overly optimistic. Last month, Korea's exports recorded $57.27 billion, down 1.3% compared to the previous year. Monthly exports have decreased year-over-year for the first time in four months since January. From October 2023 to December last year, there was a continuous flow of 'export plus' for 15 months, but a noticeable decline has occurred this year.

The trade balance recorded a surplus of $6.9 billion, but considering that imports dropped by 5.3% from the previous year in May, this reflects a 'recessionary surplus'. Exports of automobiles fell sharply by 4.4% year-over-year due to increased U.S. local production and a base effect from last year, while exports of general machinery also decreased by 5.3% compared to the previous year due to the investment contraction of corporations resulting from tariff measures. Additionally, exports of petroleum products and petrochemicals showed poor performance as the low oil price situation continued.

In particular, exports to the U.S. have sharply decreased by 8.4% during the same period, showing sluggish performance for two consecutive months. Due to the 25% tariff on imported vehicles, automobile exports dropped dramatically (-32%), and semiconductor exports to the U.S. also decreased by 17% compared to the previous year due to stockpiling from advance purchases in the first quarter. Fortunately, total semiconductor exports increased by 21.2% year-over-year, which is relatively good.

In the securities industry, it is anticipated that the risks of trade disputes will persist amid the legal controversies surrounding tariffs. On the 28th of last month (local time), the U.S. Federal International Trade Court ruled that some tariff measures implemented by the Trump administration based on the International Emergency Economic Powers Act (IEEPA) were illegal. However, due to an appeal from the White House, the appellate court suspended the enforcement of the lower court's ruling. The Trump administration is expected to impose tariffs by utilizing Trade Act sections 122 and 301, as well as Trade Expansion Act section 232, regardless of IEEPA.

In reality, the 25% tariffs on steel, aluminum, cars, and auto parts are based on section 232 of the Trade Expansion Act. The Trump administration announced plans to increase tariffs on steel and aluminum from 25% to 50% starting from the 4th.

In such circumstances, domestic consumption stocks may serve as an alternative. Labor Kil, a researcher at Shinhan Investment Corp., noted, "Domestic consumption stocks have the effect of improving consumption due to fiscal policy and are unaffected by export uncertainties."

He stated, "(Domestic consumption stocks) are expected to reflect the consumption stimulus effect in the second half of the year and replace export stocks and leading stocks in the recovery phase of the global economy next year." Shinhan Investment Corp. identified media, utilities, and hotel, leisure, and retail sectors as relevant industries.