[Good Morning Stock Market] "Pandemics Cannot Change Economic and Market Trends... Existing Trends Will Be Restored"

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] The domestic stock market is expected to return to the trend prior to the outbreak of the novel coronavirus (COVID-19). Based on past patterns, after an epidemic outbreak, the market tends to revert to its previous trend rather than breaking away from it. Before the COVID-19 outbreak, the KOSPI was in a box range, and fundamentals were in a recovery phase.

◆Hakkyun Kim, Researcher at Shin Young Securities=Since the 2000s, when major epidemics occurred, the KOSPI was temporarily affected but there was no prolonged correction. In fact, the short-term correction intensity during the current COVID-19 outbreak was exceptionally deep. This short-term correction reached -6.5%, whereas during past outbreaks such as Severe Acute Respiratory Syndrome (SARS), H1N1 influenza (swine flu), and Middle East Respiratory Syndrome (MERS), the correction intensity was only around 3-4%.

After the short-term shock, the KOSPI tended to move according to the fundamentals and market conditions at the time rather than the epidemic itself. During the SARS and swine flu outbreaks, the KOSPI showed rapid recovery after the short-term shock. In both cases, the absolute level of the KOSPI was low, and the overall market environment was favorable for the stock market. March 2003, when the SARS risk became prominent, was near the bottom of a three-year bear market following the IT bubble burst.

Moreover, even before the SARS risk emerged, the KOSPI was already suppressed by negative factors such as the U.S. invasion of Iraq (Second Gulf War), SK Global accounting fraud, and the collapse of the credit card bubble. Since a significant correction was already underway, the market reacted sluggishly to the SARS risk.

The 2009 swine flu outbreak occurred near the bottom following the global financial crisis, so the KOSPI had sufficient price merit. Additionally, the Federal Reserve's first round of quantitative easing was underway, providing a safety net from the central bank.

After the 2015 MERS outbreak, the KOSPI experienced a considerable correction, but this was due to concerns about the Chinese economy rather than the disease itself. MERS was more of a localized negative factor centered in the Middle East, with South Korea affected due to quarantine failures. China was largely unrelated to MERS, but the Chinese stock market fell sharply due to the bursting of the post-Hong Kong Stock Connect bubble and fears of a currency crisis. The weakness in the Korean stock market at that time should be interpreted as synchronization with China rather than due to the epidemic.

Based on past patterns, after an epidemic outbreak, the market tends to revert to its previous trend rather than breaking away from it. Before the COVID-19 outbreak, the KOSPI was in a box range, and fundamentals were in a recovery phase.

Epidemics damage fundamentals, but it is difficult to accurately gauge the extent. However, since the Korean economy has been suppressed across the board over the past few years due to the aftereffects of the U.S.-China trade dispute, there is little excessive rebound to be expected. Because the economic base is very low, paradoxically, the likelihood of further decline is not high.

The primary shock to the stock market related to COVID-19 was sufficiently reflected during the correction process from late January to early February. Going forward, volatility is expected to increase day by day depending on news flow.

The point at which the market will turn to a full-fledged upward trend will likely be when the rate of increase in confirmed COVID-19 cases slows down. During the 2003 SARS crisis, the Hong Kong stock market bottomed when the growth rate of SARS cases began to decelerate. The market reacted ahead of the official declaration of SARS eradication. This is a reference signal for the stock market bottom during the COVID-19 outbreak.

◆Seungyoung Park, Researcher at Hanwha Investment & Securities=About two weeks have passed since the COVID-19 outbreak began to spread. While the prevailing opinion is to wait until next week, looking at the COVID-19 statistics compiled from January 22 until now, there is cautious hope that the situation will be controlled rather than further spread.

There are three reasons for this view. First, the growth rate of confirmed cases is slowing down in other regions of China except Hubei Province, where Wuhan is located. Second, outside Hubei Province, the number of deaths has not increased beyond 11. The mortality rate in Hubei Province is also slowly decreasing. Third, the recovery rate is rapidly increasing outside Hubei Province. In particular, the number of recovered patients rose from 37 on January 29 to 239 on February 3.

The rebound in the domestic stock market since September last year was rational. The stock market rise this year was largely emotional, based on Fear Of Missing Out (FOMO). Last week, FOMO subsided and virus fear spread. Now, virus fear is diminishing. When fear spreads in the stock market and irrational behavior appears, a safety margin is secured. From now on, it is especially necessary to be rational. It is considered a good time to buy stocks with a safety margin.

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