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Meritz Report: "The Market Cautions Against Utopia"

[Image source=Yonhap News]

[Asia Economy Reporter Junho Hwang] Last year brought a year of turmoil due to COVID-19, but investors still invested in the stock market. Considering this year’s economic improvement trend and the accommodative monetary policies both domestically and internationally, investor sentiment toward risk assets remains strong. However, following the sharp fluctuations in cryptocurrencies earlier this year and the short-selling issues related to GameStop, there are concerns that the overheated financial market may have entered a zone of excessive concentration. Meritz Securities released a report on the 9th analyzing various issues surrounding the current stock market titled "The Market Cautions Against Utopia."

The Game Does Not Change Easily

The Korean stock market showed relative strength from the end of last year but entered a consolidation phase from mid-January. The $1.9 trillion fiscal policy in the U.S. and accommodative monetary policies of major countries have not yet reached a point to reverse the slope of global liquidity (M2) supply.

There are positive aspects compared to last year. The growth forecasts for major countries centered on the U.S. and China are being revised upward recently. Major central banks are maintaining the liquidity supply stance from last year, and the U.S. and Europe are also continuing expansionary fiscal policies.

This situation is likely to support investors’ preference for risk assets this year as well. Economic improvement, inflation stimulation, interest rate increases, changes in monetary policy, and liquidity reduction are the biggest risks to watch out for in this year’s stock market.

Yoon Yeosang, a bond strategy researcher at Meritz Securities, explained, "At least this year, policies may slow the pace of liquidity supply but it is not yet the stage to consider withdrawal." He added, "Reviewing the overall financial market conditions, the current market movements are not at a level where the risk preference game changes."

Optimism Is Dangerous

However, liquidity, sentiment, and volatility indicators often need to be examined inversely. Although the economy is expected to improve, rising commodity prices can lead to inflation increases and pose a risk of shifting to a more accommodative policy stance.

According to the U.S. economic news agency Bloomberg’s indicators that measure market sentiment based on 52-week highs and lows, the market appears overheated. It is natural for concerns to rise as indices hit new highs. However, the market’s overheating worries have eased as the market’s bullish outlook measured by the AAII survey, a representative contrarian indicator, has recently declined significantly.

Researcher Yoon said, "One of the most important and difficult judgments in financial markets is identifying inflection points, that is, whether the game is changing." He explained, "If last year was about following leading stocks to the extent that ‘burning’ was a trend, this year is a time to carefully ‘ride the waves’ by assessing the current market sentiment conditions."

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