Stock Market Hit by 'New Coronavirus'... How Far Will KOSPI Fall?

Short-Term Volatility Expansion
Worst-Case Scenario: Foreign Investor Outflow Could Push Below 1900
However, If the Rise in COVID-19 Cases Stops, a Rebound Is Expected "Infectious Disease Fear Has Never Changed Economic Direction"
KOSPI Secures Support at 2000-2100 Range

[Asia Economy Reporter Oh Ju-yeon] Fear of the novel coronavirus infection (Wuhan pneumonia) is shaking global stock markets. This is due to concerns that consumer sentiment may shrink and negatively impact global trade and the economy. Although global stock markets may show unstable trends for the time being, there is an analysis that fundamentals (corporate earnings) will become important, as global infectious disease fears since 2000 have never changed the direction of the economy.

Daishin Securities, in its 'Coronavirus Response Strategy' report, forecasted that "after short-term volatility expands, the KOSPI is expected to resume its upward trend," and "support will be secured around the 2100 level on the KOSPI."

Daishin Securities noted that although the novel coronavirus is currently concentrated in China, if deaths occur outside China, the fear will be maximized. However, they emphasized that if the rate of confirmed cases slows down, anxiety will stabilize. Typically, the increase in confirmed cases peaked about one month after the outbreak began, and considering that the novel coronavirus spread started in mid-January, early to mid-February will be a turning point.

Daishin Securities presented three scenarios based on the progress of the novel coronavirus. Among them, the scenario where the increase in confirmed cases slows down by mid-February and the number of deaths in China stabilizes is considered the most likely.

Daishin Securities stated, "In the short term, contraction in Chinese consumer sentiment and economic uncertainty are inevitable, but the actual impact on the global economy is expected to be limited," emphasizing that "since 2000, global infectious disease fears have never changed the direction of the economy."

They analyzed that the stock market also continued its existing trend after short-term volatility expansion, noting that since 1981, there have been 13 infectious disease outbreaks worldwide, and the stock market returns (based on global stock markets) one month, three months, and six months after the outbreaks were 0.44%, 3.08%, and 8.50%, respectively.

They predicted that this time as well, after short-term volatility expands, the upward trend will resume.

Daishin Securities explained, "If the impact on global fundamentals is limited, the KOSPI is expected to secure support in the 2000?2100 range," considering that the current 12-month forward return on equity (ROE) is 7.9% and the won-dollar exchange rate is fluctuating around 1180 won.

Although unlikely, the worst-case scenario could unfold similarly to the Chinese economic situation during Severe Acute Respiratory Syndrome (SARS).

SARS spread over five months and negatively affected the Chinese economy for more than one quarter. Chinese retail sales and industrial production declined for five consecutive months starting from January 2002. Retail sales dropped from 10% to 4.3%, and industrial production decreased from 17.3% to 13.7%. China's GDP growth rate in the second quarter of 2003 was 9.1%, down 2 percentage points from 11.1% in the previous quarter.

This scenario is valid if the novel coronavirus persists for more than one quarter.

However, the SARS outbreak began in December 2002, and the Chinese government officially prepared countermeasures starting from the April 2nd State Council meeting, where the importance of SARS prevention and treatment was mentioned.

Daishin Securities explained, "The spread phase lasted for four months after SARS emerged," and "it was only after a month since the Chinese government intervened that the situation entered a stabilization phase in May." They added, "If the Chinese economy suffers a shock similar to SARS, the global GDP growth rate could decline by 0.3 percentage points," diagnosing that "this could have a ripple effect greater than the disappearance of expectations for the US-China trade agreement."

In this case, a sharp dollar strengthening and yuan weakening would stimulate financial market volatility, and if foreign capital outflows due to won depreciation materialize, the possibility of the KOSPI falling below 1900 cannot be ruled out.

However, even if the global economy is affected, the possibility of a long-term recession remains low.

Daishin Securities predicted, "Recalling once again that past infectious disease issues have never changed the trend of the global economy and financial markets, if the increase in confirmed cases stops, Chinese economic indicators are likely to rebound."

This content was produced with the assistance of AI translation services.