COVID-19 4th Wave + Earnings Momentum Weakening... Will KOSPI Be Boxed In?

[Asia Economy Reporter Ji Yeon-jin] There is a forecast that the domestic stock market will remain trapped in a box range. This is because the fourth wave of COVID-19 has led to strengthened social distancing measures, inevitably causing setbacks in expectations for economic normalization during the summer, and the sentiment regarding second-quarter earnings is also not optimistic.

According to the financial investment industry on the 11th, concerns about the economic fundamentals are expected to continue due to the fourth wave of COVID-19. Recently, more than 20% of new domestic confirmed cases are estimated to be the highly transmissible Delta variant, and when comparing countries with higher proportions of the Delta variant than Korea, it has been confirmed that the higher the vaccination rate, the relatively lower the fatality rate. As was the case during the first to third waves, domestic mobility weakening may cause expectations for economic normalization in the summer to retreat.

It is also pointed out that the market sentiment toward the second-quarter earnings season is not very favorable. This can be seen through the stock price adjustment of Samsung Electronics, which recorded an earnings surprise, as the market is focusing more on the future profit direction than how good past earnings were. It is explained that the possibility of weakening earnings momentum in the second half due to the disappearance of various base effects is being reflected in stock prices in advance.

So-eun Ahn, a researcher at IBK Securities, said, "This is a different pattern from the first-quarter earnings season, which had already priced in expectations for economic normalization," adding, "Unlike in early April when the consensus for KOSPI operating profit for quarters 1 to 4 was simultaneously revised upward, lifting the stock market, as of early July, the upward revision strength for quarters 2 to 4 consensus is minimal, meaning that earnings expectations are limited in strongly driving the stock market as they did in the first-quarter earnings season."

The decline in growth rates of Chinese indicators this week may also burden investor sentiment. Among major countries, China is the first to announce its second-quarter GDP growth rate, which is expected to fall from 18.3% year-on-year in the first quarter to around 8% in the second quarter. Since the COVID-19 base effect disappears first, the decline in growth rate will also become visible earlier. Although this is a predictable sequence, it may lead to a downward adjustment of the currently elevated market expectations. China's economic surprise index is already in negative territory. While indicators from advanced countries such as the U.S. are trending upward due to economic normalization effects, the peak and subsequent decline in China's growth rate could pose a burden on Korea's economy and earnings.

On the other hand, there are factors supporting the stock price floor. Liquidity remains abundant, and the financial market is accommodative (Goldman Sachs Financial Conditions Index is declining). The spread of COVID-19 variants may partially mitigate the risk of early normalization of monetary policy. Researcher Ahn said, "The Bank of Korea has already signaled rate hikes for the second half of the year, and the Federal Reserve has also started tapering discussions," but added, "Considering the spread of COVID-19 and employment conditions, it seems difficult to shift toward aggressive tightening beyond market expectations."

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