Stock Market Already 'Yeongkkeul'-ed Expectations... Vaccine and Stimulus Key to Next Rally

Korean Stock Market Entering Adjustment Phase, Anticipating Next Year's Corporate Earnings and Economic Growth
Fundamental Expectations Must Improve for Reentry into Bull Market
COVID-19 Vaccines and Stimulus Measures Are Key... "Let's Reconsider Familiar Factors"

On the morning of February 6, the first holiday of the month, citizens waiting for testing at the temporary COVID-19 screening site set up at Seoul Station Plaza. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The domestic stock market is experiencing a correction as it preemptively reflects expectations for corporate profits and economic growth next year. Analysts suggest that only when expectations for next year's fundamentals rise further through COVID-19 vaccines and economic stimulus measures can the correction phase be overcome.

According to the Korea Exchange on the 7th, the KOSPI closed at 3,120.63 on the 5th, up 1.07% from the previous day. After closing at 3,208.99 on the 25th of last month, surpassing the 3,200 mark for the first time ever on a closing basis, it dropped to 2,976.21 on the 29th, then recovered back to the 3,000 level the following month. However, the rebound remains weak. The market is in a correction phase, fluctuating between the high 3,000s and low 3,100s. Due to the global uncertainty spreading from the incident where individual investors collectively bought 'GameStop' stocks in protest against short selling, causing hedge funds to suffer significant losses, along with recent concerns such as the People's Bank of China's potential tightening, the factors that triggered the recent sharp market decline have not been fully resolved.

Korean Stock Market Preemptively Reflecting This Year's and Next Year's Economic Growth Expectations

IBK Investment & Securities cited the lack of upward momentum as the background for this correction. While expectations for economic recovery this year remain valid, the stock market has already preemptively priced in not only this year's but also next year's economic and earnings recovery expectations. Soeun Ahn, a researcher at IBK Investment & Securities, explained, "The current KOSPI 12-month forward price-to-earnings ratio (PER) is around 15 times, which is much higher than the 2010-2019 average of 9.7 times before COVID-19. The PER calculated based on earnings forecasts for 2022, when the economy is expected to normalize after the COVID-19 shock, is also high at 12.4 times."

The same applies when looking at other valuation methods such as the 'Buffett Indicator,' which divides market capitalization by nominal GDP. The ratio of KOSPI market capitalization to nominal GDP over the past four quarters is 1.12 times, significantly exceeding the historical average of 0.78 times. Even when applying market-expected GDP for the end of this year and next year, the ratios are 1.08 and 1.04 times, respectively, still higher than the historical average. Typically, a Buffett Indicator below 0.8 is considered undervalued, and above 1.0 is considered overvalued. Researcher Ahn noted, "Although there are structural changes such as liquidity and sector composition compared to the past, the current stock price level, which preemptively reflects 2022 earnings and economic recovery, could be burdensome. Unless liquidity expansion strengthens further, expectations for earnings and economic fundamentals for this year and next year need to grow additionally for the bull market to resume."

Vaccines and Stimulus: Familiar but the Most Important Variables

IBK Investment & Securities diagnosed that the top priority variables to raise fundamental expectations for this year and next are COVID-19 vaccines and economic stimulus measures. This is because, although familiar, they remain the most crucial factors. Researcher Ahn said, "COVID-19 vaccinations are underway, and major countries have announced additional stimulus measures, but it is difficult to gauge the magnitude and timing of the upward pressure on corporate profits and the economy caused by these." He added, "This is why we believe the expected effects have not yet been fully reflected in various forecasts." Depending on the progress of vaccinations, COVID-19 spread trends, and the specifics of additional stimulus measures, upward revisions in corporate profits and growth forecasts for this year and next could support a bull market."

Although COVID-19 vaccinations are still in the early stages, the expected effects can be anticipated through leading country cases. Israel is a representative example. Earlier this month, it had already achieved a 37% vaccination rate. While this does not reach the level for herd immunity, it is considered to be showing meaningful effects. Research results from Israel, which started administering Pfizer vaccines, indicated a 92% prevention efficacy.

Domestic COVID-19 vaccinations have not yet started. The global vaccination rate has just surpassed 1%. When measured based on those who have received all required doses for vaccine effectiveness, the rate drops to about 0.15%. Considering the Israeli case, as vaccinations expand, market expectations for economic recovery could rise. The expected decline in new COVID-19 cases in the US and Europe due to lockdown measures taken at the end of last year and the end of the winter season is also positive.

Among economic stimulus measures, the US administration's fiscal stimulus is undoubtedly key. With President Joe Biden's election, the announcement of a $900 billion stimulus package, Democratic control of both the House and Senate (Blue Wave), and the announcement of an additional $1.9 trillion stimulus plan, expectations for US corporate profits and growth have increased. Given the ongoing expansionary fiscal policy in response to COVID-19, market expectations are likely to rise further.

The expected effects of the $1.9 trillion stimulus may not yet be fully reflected in corporate profit and growth forecasts. This is because the market has anticipated that the stimulus size and policy strength might be reduced due to Republican opposition. However, the Biden administration is pushing the $1.9 trillion stimulus more aggressively than expected and is proceeding with budget reconciliation procedures that allow passing the bill by majority vote in the Senate.

Researcher Ahn said, "Considering the remaining procedures, the final approval of the stimulus may be delayed until March, but it seems clear that the stimulus size will exceed the market's initial consensus. Furthermore, the economic recovery plan announced by the Biden administration as the next policy step will also form additional momentum for the stock market."

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