What Happens to the Stock Market if Social Distancing is Raised to Level 3? "Recovery Cooled... 10% Correction Inevitable"

441 New COVID-19 Cases Surge on the 27th
Stock Market Shakes Every Morning at 10 AM Since COVID Resurgence... Rising 'Anxiety'

BOK Lowers Economic Growth Forecast to -1.3% This Year
"If Upgraded to Level 3, Sanctions Will Be Stricter Than Feb-Mar... Domestic Sectors to Be Most Affected"

Crash Like March Unlikely
'Time Adjustment' Possible Due to Elevated Valuations

[Asia Economy Reporters O Ju-yeon and Lee Min-woo] As the number of confirmed cases of the novel coronavirus infection (COVID-19) surpassed 400, calls for raising social distancing to level 3 are growing louder. If this happens, all activities except essential socio-economic activities will be fundamentally prohibited, which is expected to place a greater burden on the domestic stock market that had painted a rosy outlook after the KOSPI broke through the 2400 mark. Since the stock market valuation is high compared to fundamentals (corporate earnings), the consensus in the securities industry is that an index correction based on this pretext is inevitable. However, the possibility of a crash like that at the end of March is low, with emphasis placed on a 'period adjustment' of around 10%.

[Image source=Yonhap News]

According to the Korea Exchange on the 27th, the KOSPI opened at 2371.95, up 0.11% from the previous trading day, but after the Korea Centers for Disease Control and Prevention announced the number of new COVID-19 confirmed cases at 10 a.m., it turned to a decline during the session, falling 0.58% to 2355.68.

Since mid-month, the domestic stock market has been volatile around 10 a.m. every day. This is analyzed as reflecting investor anxiety due to the increasing trend of COVID-19 cases in investment patterns. When 441 new COVID-19 cases were announced that day, stock market investors appeared to weigh the possibility of raising social distancing to level 3. Individual investors purchased 118.925 billion KRW worth of 'KODEX 200 Futures Inverse 2X,' which profits when the index falls, over four trading days since the 21st. It ranks second in net purchases by individuals after Samsung Electronics (229.229 billion KRW). While large-cap stocks are being bought at low points, investors are betting on a decline in the index.

Social Distancing Level 3, Even If Implemented Only in the Capital Area for 2 Weeks, Annual Growth Rate Drops by 0.2%p

The Capital Area Accounts for Over 52% of the Entire Economy... Significant Impact

KB Securities analyzed that raising social distancing to level 3 would cause economic contraction due to consumption shrinkage, production decline, and employment deterioration, and predicted that the economic recovery in the second half of the year would slow down more than initially expected due to the resurgence of COVID-19. The economic growth rate was revised downward by 0.4 percentage points to -1.3%. This matches the growth forecast of -1.3% announced by the Bank of Korea in its economic outlook report that day. The Bank of Korea recently lowered its forecast by 1.1 percentage points reflecting the resurgence of COVID-19.

According to KB Securities' scenario for raising social distancing to level 3, even if implemented only in the capital area for two weeks, the annual growth rate is expected to contract by about 0.2 percentage points. The capital area accounts for more than 52% of the entire economy, so its impact is significant. If the period is extended to one month, the contraction effect expands to about 0.4 percentage points annually, and if implemented nationwide, the contraction effect is expected to be more than double.

Researcher Oh Jae-young of KB Securities said, "During the period of social distancing level 3, overall production and consumption will be affected by about 10%," adding, "Considering that the restrictions are stricter than those in February and March and that COVID-19 began to spread in earnest after mid-month, the consumption decline in September will be greater than the average monthly contraction effect in February and March." In February, retail sales decreased by 6.1% compared to the previous month, with department stores (-22.7%), supermarkets (-34%), and specialty stores (-8.5%) experiencing significant declines.

The KOSPI opened at 2,370.87, up 22.63 points (0.96%) from the previous trading day (2,348.24). On the 19th, stock prices including the KOSPI were displayed on the electronic board in the Hana Bank dealing room in Jung-gu, Seoul. On the same day, the won-dollar exchange rate opened at 1,182.5 won, down 1.2 won from the previous trading day (1,183.7). Photo by Kim Hyun-min kimhyun81@

Domestic Industries Hit Hardest by Consumption Shrinkage

High Stock Market Valuation Makes Market Correction Inevitable

"Crash Like March Is Unlikely"... Emphasis on 'Period Adjustment'

Kiwoom Securities also diagnosed that if social distancing level 3 is implemented, domestic industries will suffer the most damage.

Kim Ji-san, head of Kiwoom Securities Research Center, said, "If raised to level 3, domestic-related industries will inevitably suffer significant damage due to consumption shrinkage," and added, "In this case, a certain degree of index decline is unavoidable." However, he predicted there would be no crash like in March. Kim said, "March was a pandemic situation worldwide, but this resurgence is limited to the domestic situation, and there is a learning effect that the spread will subside over time, so panic selling or fear is unlikely to repeat." He continued, "If the number of new confirmed cases decreases, social distancing is eased, and government consumption stimulus measures are reflected, the market will be reassured again," forecasting, "The index may undergo a period adjustment of about 10% rather than a crash."

In this atmosphere, the market is expected to show a concentration trend toward non-face-to-face (untact) sectors.

Sectoral Concentration Phenomenon

Investment Sentiment Focused on Untact Leading Stocks

Naver and Kakao, regarded as 'untact leaders,' are representative examples. Their characteristics of having online platforms covering simple consumption, content, and finance stood out, and they continued an unprecedented rally since the domestic stock market froze due to COVID-19. Kakao was only 127,500 KRW on March 19, when the KOSPI recorded its yearly low, but then began to surge rapidly. It hit new highs daily and entered the top 10 in market capitalization for the first time on May 13. On that day, at 9:25 a.m., it recorded 412,500 KRW, breaking its highest price. Naver also accelerated its rise by independently establishing Naver Financial and actively expanding untact finance. It also recorded a new high of 347,000 KRW around 9:28 a.m. that day.

As untact lifestyles became established, sectors such as 5G and network equipment also rose. This is based on the expectation that they will become core infrastructure for untact living in the future, leading to more active investment. The food and beverage sector, led by CJ CheilJedang, also showed an upward trend. As telecommuting increased due to social distancing and 'home-staying' life lengthened, demand for convenient home meals rose. Additionally, sectors providing services related to telemedicine, remote education, and remote work also saw significant gains.

Shin Ji-yoon, head of KTB Investment & Securities Research Center, explained, "Since the market tends to reflect the future in advance, it is difficult to expect a sharp price correction," adding, "Throughout this month, large-cap and value stocks related to the economy, which had struggled so far, have been on the rise again, but at the point when COVID-19 is resurging, investment sentiment may again focus on untact leading stocks for the time being."

Yoon Chang-yong, head of Shinhan Financial Investment Research Center, said, "While caution regarding COVID-19 is necessary, the deterioration of investment sentiment is expected to be limited," diagnosing, "Interest may shift from contact to untact, and attention will also focus on sectors with earnings expectations beyond existing growth sectors."

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