Korean stock market urged to brace for early US tapering

Korean stock market urged to brace for early US tapering

A dealer at Hana Bank’s headquarters in Seoul in this file photo on June 17. Yonhap

KOSPI will remain solid despite Delta variant spread

By Lee Min-hyung

Despite escalating fears over the spread of the COVID-19 Delta variant, the stock market here will remain resilient throughout the latter half of 2021, as the bourse and investors display few signs of instability even at this early phase of a fourth wave of the pandemic, analysts said Wednesday.

Market participants already recognize possible fear factors surrounding the spread of the variant and appear to be fully aware that this is not a threat serious enough to incur a drastic collapse of the local stock market, according to market experts.

The benchmark KOSPI plunged sharply to the 1,400-level in March last year when the first COVID-19 wave impacted the local economy. But the stock market has not crashed and instead continued a bullish run even during the second and third waves on investor confidence that the fundamentals of Korean firms remain strong enough to quell any concerns raised by the spread of the coronavirus.

After the main bourse topped the historic 3,000-mark early this year for the first time in its history, it has since set a new high by surpassing 3,200 points on expectations of a post-COVID-19 economic recovery. Local economists argue that expectations remain of a stronger-than-expected export rebound and corporate earnings growth.

“We cannot find signs of major unrest in the stock market even amid the escalating fear of the fourth pandemic wave,” Hwang Sei-woon, an economist at the Korea Capital Market Institute, said. “Investors were anxious last year when the market tumbled and the virus panic started weighing on the economy, but this is not the case now. The pandemic is no longer a fear factor for them.”

He said the KOSPI and the junior KOSDAQ might enter an adjustment period temporarily, but there is only a slight chance of the markets experiencing any eye-catching plunges, once again, as the economy will likely remain robust until the end of the year.

“The fourth wave will not dampen investors’ confidence due to their learning effect from the previous waves of the virus,” he said.

Korean stock market urged to brace for early US tapering

People line up for COVID-19 tests in front of a temporary screening center in Seoul, Wednesday. Yonhap

Starting July 7, the nation’s daily coronavirus infections have topped 1,000 for a week, sparking concern that this will block the economy from achieving a full-fledged recovery this year amid possibly prolonged social-distancing measures. As of July 12, local authorities have raised social-distancing rules to the highest level, prohibiting any gathering of more than 3 people after 6 p.m. in the greater Seoul area.

This is feared to induce a drop in domestic consumption and put the brakes on a rapid economic recovery.

Hwang argued the toughened measure have little impact on the stock market whose future course will be determined by the timing of tapering in the U.S.

“The most important factor is how sharply U.S. inflation will continue until the end of the year,” he said. “If the country keeps grappling with inflationary fears for the next few months, there stands an ample chance that the U.S. will start taking specific steps for tapering sometime around the end of 2021.”

According to the U.S. Labor Department, the country’s consumer price index (CPI) soared 5.4 percent in June, the highest since August 2008. Korea’s CPI has also been on the rise this year. The CPI for June increased 2.4 percent from the previous year, according to data from Statistics Korea.

“The possibly earlier tapering from the world’s largest economy will lead to an interest rate hike there in 2022. This will be the biggest factor that will affect the future of the Korean stock market,” Hwang said. “But the near-term outlook for the KOSPI and Kosdaq remains optimistic until the U.S. authorities take specific action toward monetary tightening.”

The Bank of Korea (BOK) is also sending repeated signals of a key rate increase earlier than the U.S. Federal Reserve. The general consensus is that Korea’s central bank will push for a preemptive rate hike in October, with a view to controlling financial instability amid surging household debt and inflationary fears.

But a possible base rate increase of 25 basis points will likely have a limited impact on the stock market, as the bank has already delivered such signals multiple times for the financial markets to prepare for potential shocks.

The BOK will likely accelerate its moves to increase the rate further even throughout next year when the Fed is also widely expected to do so.

Eugene Investment & Securities analyst Huh Jae-hwan also noted that the spread of the Delta variant will not pose a serious threat to the stock market.

“Our view is that the Delta variant may delay the timing of an economic recovery, but this will not be a game changer in the stock market,” he said.

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