[Good Morning Stock Market] COVID-19 Is No Longer a 'Black Swan'... Lower Possibility of March Crash Recurrence

Progress in Response and Development of Therapeutics and Vaccines by Country
Possibility of Continued Easing Policy by US FED Remains
Recovery in Corporate Fundamentals and Export Indicators

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] There is an analysis that the resurgence of the novel coronavirus infection (COVID-19) is unlikely to cause a further sharp decline in the KOSPI index. Since vaccine and treatment development is underway and countries' response capabilities have improved, it is expected that the chaos seen in March will not recur. The Federal Reserve's (Fed) accommodative policy stance is also likely to continue for the time being, and with corporate fundamentals and export indicators exceeding expectations, it is interpreted that there is still resilience to withstand the COVID-19 resurgence.

◆ Seongcheol Lim, Researcher at Heungkuk Securities = As COVID-19 confirmed cases surged, fear of a second wave increased, and the release of the July Federal Open Market Committee (FOMC) minutes, which included pessimistic content about uncertain economic outlooks and additional stimulus measures such as Yield Curve Control (YCC), caused the domestic stock market to fall sharply. The KOSPI dropped 3.7% compared to the previous day. Except for June 15, when it fell sharply (-4.8%) due to concerns over COVID-19 resurgence and North Korea risks, this is the largest decline in the past three months. However, a sharp drop like that in March is unlikely to be repeated.

First, response capabilities to COVID-19 have been strengthened. Unlike the initial spread period, a minimum crisis response system is now in place, and information about the virus has increased through international cooperation. Progress in vaccine and treatment development is also positive. Major companies, including those in South Korea, are competitively advancing development. Some have shown results and plan to complete development and supply within the year. Moderna and Pfizer in the U.S. and Sinopharm in China have entered Phase 3 trials. AstraZeneca in the UK, together with Oxford University researchers, started Phase 3 trials in June, with supply possibly as early as October. South Korea and Russia are also accelerating efforts.

The Fed's accommodative policy stance is also likely to continue for the time being. Last month's FOMC minutes showed the Fed expressing skepticism about YCC, which the market perceives as an additional stimulus measure, and a cautious attitude toward liquidity supply. As a result, the stock market, which had been rising on liquidity, was halted. Attention should be paid to whether new monetary policy announcements will be made at the upcoming Jackson Hole meeting on the 27th-28th and next month's FOMC. Persistent concerns about COVID-19 resurgence and uncertain economic indicators leave room for the Fed to maintain an accommodative policy stance.

Corporate fundamentals and export indicators also exceeded expectations. As of the 20th, among the top 100 KOSPI companies by market capitalization, the second-quarter earnings surprise ratio was 65.9%. Last month's exports decreased by 7.0% year-on-year, outperforming the expected -8.3%. This is the first time in four months since March that the decline rate has fallen to single digits. Notably, exports to the U.S. increased by 7.7% year-on-year, and exports to China also rose by 2.5%, marking two consecutive months of growth.

The recent correction appears to be due to fatigue from the rally. The KOSPI surged about 21.2% over the past three months and reached a new high (2437.53), increasing valuation pressure. Except for India and Brazil, South Korea's stock market has risen the most among major countries, which is also seen as a factor in the recent sharp decline.

◆ Jiyoung Han, Researcher at Cape Investment & Securities = If the recent increase in COVID-19 confirmed cases continues, the possibility of raising social distancing to Level 3 for the first time has been raised, intensifying concerns about delays in domestic economic recovery. The global spread of COVID-19 is not being controlled easily. Anxiety is growing that the stock market could crash again as it did in February and March.

Nevertheless, the scale of the correction is not expected to be large anymore. The crash in March was a 'black swan' event caused by COVID-19 emerging from an unknown area. But now it is different. Market participants have already experienced the COVID-19 situation, so even if the resurgence continues, a crash like that in March is not expected to recur.

In daily life, it is more important than ever to wear protective masks thoroughly for public health purposes. In the stock market, concerns about overheating and uncertainties over additional stimulus agreements in the U.S. Congress remain as burdens, but it is judged that it is not yet time to wear the mask of panic and panic selling.

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