COVID-19 Raises Tension in Korean Stock Market to Peak: "Competing with Existing Leading Stocks"

Whether to Raise 'Social Distancing' to Level 3 a Turning Point Next Week
"Low Interest Rates and Low Growth Global Trend Continues... Need to Support Existing Leading Stocks"

[Asia Economy Reporter Minwoo Lee] As concerns about the second wave of the novel coronavirus infection (COVID-19) rise, tension in the domestic stock market is escalating. Given that the domestic stock market is experiencing the largest decline among major global stock markets, caution toward domestic stocks is increasing. Analysts suggest a conservative approach to domestic demand stocks and cyclical sectors while paying attention to existing leading stocks.

According to the Central Disease Control Headquarters on the 23rd, as of midnight, the number of new COVID-19 cases in South Korea was recorded at 397, the largest since March 7 when there were 483 cases. For ten consecutive days, the daily new cases have remained in the triple digits: 103 → 166 → 279 → 197 → 246 → 297 → 288 → 324 → 332 → 397 since the 14th.

SK Securities emphasized the need to closely monitor the COVID-19 spread in the coming week. If the spread continues and social distancing measures are raised to level 3, it would cause a significant shock to all economic activities. The government decides to escalate social distancing if the two-week average of daily confirmed cases is between 100 and 200 or more, and if the daily cases double twice or more per week. Since triple-digit cases have been reported for 10 days already, next week is a critical turning point.

Ha Dae-hoon, a researcher at SK Securities, said, "Although there was disappointment over the U.S. Federal Reserve's July Federal Open Market Committee (FOMC) minutes, which included pessimistic views on uncertain economic outlook and yield curve control (YCC) and additional stimulus measures, the fact that the domestic stock market showed the largest decline among major markets indicates heightened caution about the domestic situation." He added, "Especially for domestic demand stocks and cyclical sectors, a conservative approach is necessary."

However, it is important to note that the market rally up to the current level was led by growth stocks amid low growth and low interest rates. Lee Jaeman, a researcher at Hana Financial Investment, said, "Although volatility increased due to COVID-19, the U.S., which holds hegemony over the global stock market, especially the Nasdaq, rose for four consecutive weeks." He pointed out, "Although recent gains in Amazon, Microsoft, Facebook, and Netflix have somewhat slowed, Apple (with a 12% market cap ratio in Nasdaq at its peak), Tesla (2.2% at its peak), and Nvidia (1.8% at its peak) have taken their place, so the cyclical upward structure within growth stocks remains unchanged."

Lee viewed that the domestic stock market follows the hegemony of the global stock market, whether it is the U.S. or China, and the leading stocks at the time, called growth stocks, drive the index upward. Recently, Samsung Biologics, Naver, and LG Chem, ranked 3rd to 5th in KOSPI market capitalization, are eyeing the 2nd place held by SK Hynix. In past cases when the 2nd largest market cap changed?2007 (Korea Electric Power → POSCO), 2011 (POSCO → Hyundai Motor), and 2017 (Hyundai Motor → SK Hynix)?the KOSPI recorded new highs.

Lee explained, "From a long-term perspective, if the concept of low interest rates, Nasdaq, and growth stocks leading the global stock market does not change, it is necessary to respond to index correction phases by expanding the proportion of existing leading stocks." He added, "Although leading stocks tend to weaken during index correction phases, they have shown rapid recovery when the index rises again."

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