[Weekly Market Review] No Wings for the Stock Market Plunge Triggered by COVID-19

[Asia Economy Reporter Oh Joo-yeon] Amid the global stock markets fluctuating due to the novel coronavirus infection (COVID-19), the domestic stock market also experienced a rollercoaster week last week. On the 19th, the KOSPI and KOSDAQ indices plunged by 8% and 11% respectively, marking record-breaking drops in both point decline and percentage fall, only to surge by 7% and 9% during the trading session the following day. Although the market managed to reverse the mood, it was insufficient to recover the losses incurred over the week. From March 16 to 20, during the third week of March, the KOSPI opened at 1805.43 and closed at 1566.15, losing 239.28 points or 13.25% over five trading days.

According to the Korea Exchange on the 21st, both the KOSPI and KOSDAQ markets showed significant gains on the 20th, bringing a breath of fresh air to the domestic stock market after a while. This was thanks to market stabilization measures such as the expansion of the currency swap agreement by the U.S. Federal Reserve (Fed) and the rebound of major European stock markets. Notably, a buy-sidecar was triggered in the securities market. The exchange explained, "The buy-sidecar was activated as the KOSPI200 futures (most recent month) rose more than 5% above the previous day's closing price for five consecutive minutes." This was the first time a buy-sidecar was triggered in the securities market due to futures price increases since December 1, 2011.

Lee Kyung-min, a researcher at Daishin Securities, said, "The recent continuous plunge stopped with the news of the Korea-U.S. currency swap agreement," adding, "For the first time since 2008, the Fed announced a currency swap agreement worth $60 billion with nine central banks including the Bank of Korea, coupled with oil price rebounds and strong economic stimulus measures announced consecutively by major European countries, which partially controlled financial market volatility and eased the panic market."

This sharp rise was a rebound from the panic state of the previous day’s market.

On the 19th, the KOSPI dropped by 133.56 points (8.39%), marking the largest single-day point decline in history based on closing prices. The previous record was a 126.50-point drop on October 16, 2008, during the global financial crisis. The KOSDAQ fell by 11.71%, recording the highest percentage drop since the market's inception in 1996.

So far, the domestic stock market has experienced record-breaking crashes during past crises such as the foreign exchange crisis, the early 2000s IT bubble burst, the September 11 attacks in 2001, and the 2008 global financial crisis.

On December 3, 1997, when the IMF bailout was decided, stock prices fell by 52.12% from the year's high, effectively halving. In 2000, when the IT bubble burst, the stock price dropped from 1059.04 at the beginning of the year to 504.73 by the end of October. Particularly, on April 17, known as Black Friday, the KOSPI fell 11.63% for the first time triggering a circuit breaker, as the New York Stock Exchange plunged due to the IT bubble collapse.

On September 12, 2001, the day after the 9/11 attacks, the KOSPI plunged 12.2%, marking the highest percentage drop in history.

During the financial crisis in 2008, the KOSPI fell from 1888.88 on May 16 to 1425.26 on September 17, when Lehman Brothers filed for bankruptcy, a 24.54% drop, and further plunged to 938.75 on October 24. Circuit breakers were triggered consecutively on October 23 and 24 in the KOSDAQ market.

Looking back at this history, the current panic market caused by COVID-19 has been partially curbed by the Korea-U.S. currency swap agreement news, but the securities industry views this as not a fundamental solution.

Lee Eun-taek, a researcher at KB Securities, pointed out, "There are three problems in the Korean stock market: concerns about economic recession due to the virus, liquidity shortages and credit issues, and the strong dollar."

He said, "The strong dollar fire was put out through the currency swap, but looking at past currency swap cases, fundamental problem resolution is necessary for the Korean won's stability to fully materialize."

He explained that the market has started to focus again on economic recession. On the 19th (local time), the U.S. Department of Labor announced that new unemployment claims for the week ending the 14th reached 281,000, an increase of 70,000 from the previous week. This is the highest level in about two and a half years since September 2017. Due to movement restrictions, layoffs were concentrated in travel and leisure sectors, and many companies have reportedly halted new hiring. If large corporations in the airline and hotel chains proceed with layoffs, the impact is expected to be even greater. The researcher said, "The unemployment rate is expected to surge at least until April."

Regarding the White House's mention of "establishing emergency plans including scenarios where COVID-19 impacts last up to 18 months," he interpreted, "This does not mean continuous spread for 18 months, but assumes that complete normalization will be difficult if confirmed cases continue to emerge regionally, as in our country." He emphasized, "Although the end of March, which was closely watched, is approaching, we need to wait a little longer for the data to be released in early April."

There are also opinions that "enduring is the best strategy" at present. This means there is no tactical benefit in responding with panic selling or switching investments.

Kim Yong-gu, a researcher at Hana Financial Investment, said, "If we follow the absolute correlation between this year's KOSPI operating profit consensus and index changes, the current index level assumes a sharp drop in 2020 KOSPI operating profit to the 80 trillion won range." This implies that, considering the current market consensus of 160.8 trillion won, a halving of earnings is inevitable going forward. However, even assuming the worst-case scenario, he sees the likelihood of its realization as extremely low.

Kim said, "If the MSCI EM index's 12-month forward PBR (currently 1.11 times) falls further to the level during the 2008 U.S. financial crisis (0.95 times), the corresponding KOSPI index would be around 1350, which means the market's rock bottom that can be assumed when all remedies are ineffective."

He added, "Considering the market demand environment comprehensively, there is no tactical benefit in panic selling or switching trades at this point. Signals such as expectations for COVID-19 treatment development and the ongoing global policy responses suggest that enduring may be the best strategy now." He emphasized, "It is time to consider the market phase transition from panic to survival, and from fear of recession to expectations of recovery."

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