[Weekly Market Outlook] Will the KOSPI Hold the 1500 Level?

[Asia Economy Reporter Oh Ju-yeon] This week (23rd-27th), the domestic stock market is expected to continue a volatile trend due to concerns over the economic impact caused by the novel coronavirus infection (COVID-19). As COVID-19 rapidly spreads, countries are successively closing their borders. Consequently, the global economic outlook is becoming increasingly bleak.

According to foreign media on the 22nd, global credit rating agency Fitch stated in its March 2020 Global Economic Outlook report that the COVID-19 crisis is pressuring the global gross domestic product (GDP), lowering the 2020 growth forecast from 2.5% predicted in December last year to 1.3%.

Amid this trend, the domestic economic outlook is also grim. On the same day, Bloomberg surveyed economists from economic analysis institutions and investment banks (IBs), finding that the probability of South Korea entering a recession within the next 12 months was 33%. This was only 18% as of January this year but sharply increased to 20% in February and 33% in March.

KB Securities revised down its 2020 South Korean economic growth forecast by 0.6 percentage points from 2.1% to 1.5% due to the impact of COVID-19. They explained that the economic impact in Korea is concentrated on domestic demand contraction in February and March, assuming that COVID-19 will enter a stabilization phase as early as April or May, and that the economic damage will slightly ease from the second quarter.

However, the increase in confirmed cases in major advanced countries such as the United States and Europe is expected to lead to a slowdown in global demand in the second and third quarters, potentially limiting South Korea's economic rebound.

Researcher Oh Jae-young said, "We expect South Korea's economy to contract by -0.7% quarter-on-quarter in the first quarter of 2020," adding, "Private consumption and service sector economic indicators are expected to shrink after February, with exports to China slowing in February and exports to advanced countries declining after March, delaying economic recovery."

Oh also forecasted, "In the second quarter, South Korea's economy is expected to recover slightly due to improvements in the service sector from the slowdown in confirmed cases and the effects of increased government spending, thus avoiding a technical recession with consecutive contractions in the first and second quarters. However, if the economic downturn in advanced countries in the second quarter exceeds expectations or risks such as a credit crisis occur, the possibility of contraction in the second quarter cannot be ruled out."

Accordingly, it has become difficult to gauge the 'bottom' of the domestic stock market. The KOSPI, which had fallen to the 1400 level, jumped to 1566.15 on the 19th, supported by 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. However, it is uncertain how long this level can be maintained. On the 20th (local time), the Dow Jones Industrial Average closed at 19,173.98, down 913.21 points (4.55%) from the previous day; the S&P 500 fell 104.47 points (4.34%) to 2,304.92; and the Nasdaq dropped 271.06 points (3.79%) to 6,879.52.

International oil prices also plunged again just one day after a sharp rebound. On the New York Mercantile Exchange (NYMEX), West Texas Intermediate (WTI) crude oil for April delivery closed at $22.53 per barrel, down 10.6% ($2.69).

Seosangyoung, a researcher at Kiwoom Securities, said, "As the number of COVID-19 cases in the U.S. rapidly increases, some states including New York and Illinois, following California, have issued stay-at-home orders shutting down all non-essential businesses, raising concerns about a surge in employment instability." He added that some investment firms have reported a sharp rise in new unemployment claims, with analyses suggesting the unemployment rate could surge above 10%, far exceeding the current 3.5%, further fueling recession fears.

Seosangyoung also noted, "Meanwhile, despite President Trump's active intervention, oil prices plunged after news emerged that Russia would not yield to Trump's threats," adding, "Concerns over weak demand are also a negative factor."

Kim Byung-yeon, a researcher at NH Investment & Securities, said, "The recent speed and magnitude of the index decline are faster than during the Black Monday in October 1987," and added, "The rapid decline before and after Black Monday is often attributed to program trading, and the higher passive investment ratio (increase in index ETFs, program and algorithmic trading, redemptions of asset allocation funds) compared to the past is also interpreted as a cause of high volatility."

Kim Yong-gu, a researcher at Hana Financial Investment, predicted, "Next week, the domestic stock market is expected to show a neutral-to-positive price trend, seeking to stabilize the KOSPI around the 1500 level amid a lull in extreme market panic." He said, "Market attention next week will focus on concrete financial market stabilization measures to be detailed during the government's second emergency economic meeting," adding, "The full-scale government policy response aligned with global policy coordination is expected to begin, with interest on the launch of a stock market stabilization fund worth 5 to 10 trillion won, reactivated for the first time since November 2008." He further noted, "It is premature to discuss a change in market character until fundamental solutions such as treatments and vaccine development are concretized, but the emergence of a buffer mechanism against foreign sell-offs is a positive factor like a rain in a drought."

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