Increased Volatility in the Stock Market Due to COVID-19... What Are the Response Strategies?

Volatility Expansion Inevitable for the Time Being
Expected Around 2050 Points Next Month
Calls for Policy Support Also Raised

[Asia Economy Reporter Song Hwajeong] As the number of confirmed cases of the novel coronavirus infection (COVID-19) rapidly increases, concerns about the stock market are also growing. Experts unanimously agree that an expansion of volatility is inevitable for the time being and that cautious responses are necessary.

On the morning of the 25th, the KOSPI and KOSDAQ started off in a downward trend but then turned upward. As of 9:55 a.m., the KOSPI recorded 2084.28, up 0.25% (5.24 points) from the previous day. The KOSDAQ was trading at 643.89, up 0.72% (4.60 points).

The stock market, which showed a panic sell-off due to COVID-19 with the KOSPI down 3% and the KOSDAQ down 4% the previous day, appeared to regain some stability on this day. However, experts predict that volatility in the stock market will inevitably increase for the time being. Kim Hyung-ryeol, head of the Kyobo Securities Research Center, said, "The stabilization of investor sentiment and stock price recovery will go hand in hand depending on how the COVID-19 adverse effects are managed," adding, "It is not easy to grasp the scope and intensity of the shock to not only financial market investor sentiment but also economic sentiment, and from an absolute valuation perspective, the investment attractiveness is not high, so the investment environment is unfavorable."

Kyobo Securities presented an expected KOSPI band of 2050 to 2250 points for next month. Director Kim explained, "The expected band is significantly lowered compared to the previous month, reflecting the increased volatility in February," and added, "Since the period for volatility reduction in the financial market may not be short, a cautious response is required at this time."

Moon Dong-yeol, a researcher at Samsung Securities, said, "Due to the deterioration of investor sentiment regarding the domestic stock market related to COVID-19, an expansion of market volatility is inevitable for the time being," and added, "In the short term, the lower bound of the KOSPI is expected to be around 2050 points, corresponding to a 12-month forward price-to-book ratio (PBR) of 0.8 times, but if the situation prolongs, the second lower bound to consider is around 1950 points, corresponding to a 12-month forward PBR of 0.77 times, which was the low recorded in August last year."

Although the possibility of further index decline cannot be ruled out, it is an area where the benefit of selling is not significant, so gradual buying responses are considered effective. Roh Dong-gil, a researcher at NH Investment & Securities, diagnosed, "In the area below the 2100-point level of the KOSPI, the benefit of selling is not significant," and added, "In the area below 2050 points, gradual buying responses are necessary rather than selling."

There was also an opinion that policy support is necessary to facilitate a rebound. Park So-yeon, a researcher at Korea Investment & Securities, said, "Considering that volatility indices such as the KOSPI 200 Volatility Index (VKOSPI) have already risen to 25, which is the past high level, it is now an area where the benefit of selling is absent," and added, "For the index to bottom out, it is most important that the price itself falls sufficiently, and monetary easing and economic stimulus movements must be confirmed in regions outside Korea as well." Han Dae-hoon, a researcher at SK Securities, observed, "In the case of the Chinese stock market, it is showing a calm appearance supported by policy expectations and the containment of the COVID-19 situation," and added, "In Korea, a consensus on supplementary budgets has been formed, and the possibility of the Bank of Korea lowering the base interest rate has increased, so the visibility and effectiveness of policy implementation, consensus on these, and the slowdown in the number of confirmed cases will be important checkpoints for bottoming out."

By sector, it is analyzed that responses centered on growth stocks and leading stocks are effective. Researcher Moon said, "We maintain a preference for semiconductors, hardware, software, and healthcare," adding, "These are leading stocks currently driving the market based on solid earnings momentum, and portfolio changes to other sectors during the market adjustment phase seem inappropriate." He further added, "These sectors tend to have the characteristics of growth stocks rather than value stocks, and the macroeconomic environment is also favorable to growth stocks due to the continuation of a low-interest-rate trend amid domestic and international uncertainties."

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