Advice has been given that investment strategies should be adjusted according to the policy direction of the U.S. Federal Reserve (Fed). Experts emphasize that it is important to read the economic projections summary (SEP) included in Federal Reserve Chair Jerome Powell's statements and dot plot, rather than the possibility of interest rate fluctuations.
Interest rates are expected to remain frozen, but if Chair Powell indicates a more accommodative currency policy than before, it could have a positive impact on the stock market due to expectations of interest rate cuts. Conversely, if the Fed maintains a hawkish stance, focusing on stocks with clearly improving performance will be advantageous.
The Federal Reserve will hold a Federal Open Market Committee (FOMC) meeting on 17th and 18th (local time). The market's attention is focused on the Fed's currency policy direction. Recently, with the KOSPI index rising nearly 12% for three consecutive weeks, it is expected that the Fed's policy direction will affect the stock market.
Experts are adopting the atmosphere of accepting the interest rate freeze in June as a 'done deal.' According to the Chicago Mercantile Exchange (CME) FedWatch, the interest rate futures market sees a 99.1% chance that the Fed will keep the benchmark interest rate frozen at 4.25% to 4.5%. The forecast for a July freeze is 84.8%.
Rather, what to watch in this FOMC is the future direction of currency policy. The key will be whether the Fed hints at the possibility of interest rate cuts after freezing the rates this month.
The first scenario is if the Fed shows 'dovish' behavior by holding off on interest rate hikes. In this case, there is a high probability that the won will strengthen against the dollar, and further potential for a rise in the KOSPI could be expanded due to foreign capital inflows.
Lee Jae-man, a researcher at Hana Securities, noted, "If the Fed's currency policy stance becomes more dovish, one of the variables for KOSPI's rise will be corporations' shareholder-friendly policies," adding, "When selecting companies, it is essential to focus on those with a higher dividend per share (DPS) growth rate compared to the earnings per share (EPS) growth rate this year, and those with a price-to-book ratio (PBR) below 1." He suggested KB Financial, Hyundai Mobis, Mirae Asset Securities, and Korean Air.
The second scenario is if the Fed maintains a slightly hawkish stance that is not significantly different from now. In this case, it would be advantageous to structure a portfolio focused on corporations with clear performance improvement prospects for the second half. This is because stocks of corporations with higher profit growth rates in the second half compared to the first half tend to show strength in June and July.
During the same period last year, the stock prices of corporations like HD Hyundai Heavy Industries and Hanwha Aerospace, which had high profit growth rates in the second half, were strong.
This researcher stated, "This trend is being reflected in the U.S. stock market as well," and added, "Among the same software sector, Oracle's stock, which has a higher EPS growth rate in the second half compared to the first half, surged 30% this month, while Intuit's stock, which is expected to have a negative growth rate in the second half, is in a stable condition."
Additionally, there are observations that the Fed may change not only the direction of its currency policy but also its policy framework. The possibility of shifting from an 'average inflation target' (AIT) that was effective in the low inflation era to a 'flexible inflation target' (FIT) that corresponds to the inflation environment is being discussed.
Kim Doo-eon, a researcher at Hana Securities, stated, "As geopolitical uncertainty, such as the Israel-Iran situation, increases, expectations for interest rate cuts have weakened, leading to a hawkish forecast for the June FOMC. However, if the Fed signals a change in its policy framework to FIT, it would be positive for stock prices."
He added, "Returning to FIT lowers the uncertainties of the Federal Reserve's currency policy and heightens expectations for interest rate cuts, indicating that it is responding to the U.S. economic situation. Historical cases show that even when meetings were anticipated to be hawkish, stocks rose when those meetings ended dovishly."