Capital Research Institute "COVID-19 Impact Likely to Last Long... Efforts Needed to Develop Long-Term Response Plans for Listed Companies Rather Than Short-Term Stock Price Drops"

[Asia Economy Reporter Oh Ju-yeon] The domestic and international stock markets are simultaneously plummeting due to the spread of the novel coronavirus infection (COVID-19). Experts point out that the domestic economic shock could be prolonged as uncontrollable global risk factors emerge. To prepare for this, it is analyzed that rather than responding to short-term foreign panic selling, it is necessary to focus on finding ways for listed companies to withstand long-term shocks.

Due to the impact of the novel coronavirus infection (COVID-19) pandemic, the global stock markets plummeted, and the KOSPI index opened at 1640.84, down 74.02 points (4.32%) from the previous trading day (1714.86) on the 17th. Dealers are busy working in the dealing room of Hana Bank in Jung-gu, Seoul. On the same day, the won-dollar exchange rate opened at 1231.0 won, up 5.0 won from the previous trading day (1226.0 won). Photo by Kim Hyun-min kimhyun81@

On the 17th, the Korea Capital Market Institute forecasted this in its report titled "Assessment of the Impact of COVID-19 on the Stock Market."

Kim Jun-seok, Senior Research Fellow at the Korea Capital Market Institute, explained, "The economic impact of this COVID-19 is expected to be at a different level compared to previous infectious diseases such as Severe Acute Respiratory Syndrome (SARS) or Middle East Respiratory Syndrome (MERS), which had localized outbreaks," adding, "Even if COVID-19 stabilizes in certain countries, recovery is inevitably delayed due to external shocks appearing with a time lag."

He further analyzed that the domestic stock market is showing synchronization with the global stock markets.

Researcher Kim stated, "Since the outbreak of COVID-19, the changes in indices of major countries, including South Korea, have shown a highly synchronized trend," and diagnosed, "The correlation coefficient between major countries' stock index returns is above 0.6, which is higher compared to 0.3 during the SARS outbreak (2002-2003) and 0.4 during the H1N1 (2009) and MERS (2015) outbreaks."

This is explained by factors such as the possibility of economic contraction in China due to COVID-19, the potential global economic slowdown caused by the spread of COVID-19, and the sharp drop in international oil prices acting as common risk factors in major countries' stock markets.

He predicted that the Korean stock market, facing uncontrollable global risk factors, will inevitably be exposed to high volatility for the time being. In particular, the decline in the domestic stock index after the COVID-19 outbreak was found to be led by foreign selling. Until the 13th, foreigners had net sold 11.5 trillion won in the securities market, and the cumulative net selling trend showed a pattern very similar to the movement of the KOSPI index.

Typically, the Korean stock index and foreign net buying show a very close correlation, especially with a higher correlation when stock prices fall. This tendency was still clearly observed during the stock price decline following the COVID-19 outbreak.

In particular, foreign net selling during the period when the decline in major countries' stock markets intensified was concentrated in sectors highly sensitive to Chinese factors, global factors, and oil factors.

Researcher Kim said, "If COVID-19, which has spread to major countries in the US and Europe, is not effectively controlled early, the damage to the global economy will be considerable," and evaluated, "Especially, the US entering the COVID-19 impact zone following China is the most negative scenario for the Korean economy." He also added, "If treatments or vaccines are developed, a turning point for stabilizing the COVID-19 situation could be created, but this will also take a considerable amount of time."

He emphasized, "Since the economic shock of COVID-19 is expected to be prolonged, the most urgent task is to seek ways for domestic listed companies with weak profitability and growth potential to withstand long-term shocks rather than responding to short-term sharp stock price drops caused by panic selling by foreigners."

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