'Nostalgic Samcheonpi and Cheonseudak'... Caution Against Overly Optimistic Views on Rapid Recovery Based on the Past

On the 25th, as additional US sanctions on Russia did not exceed market expectations and geopolitical risks eased, the KOSPI started the session with a 1% rise. Dealers are working in the dealing room at the Hana Bank headquarters in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Lee Seon-ae] The current status of KOSPI and KOSDAQ, which each crossed 3,200 points and 1,000 points to usher in the eras of 'Samcheonpi (3000+KOSPI)' and 'Cheonsdak (1000+KOSDAQ),' stands at the mid-2600s and mid-800s respectively. On the 25th, buoyed by gains in the U.S. New York stock market, they recovered losses from the 24th but still remain around the 2,670 and 870 levels. The Korean stock market has collapsed helplessly amid global financial market turmoil caused by adverse factors such as interest rate hikes by major central banks worldwide, inflationary pressures, and Russia's invasion of Ukraine. Although valuations are at the lower end compared to major global stock markets, the prevailing view is that stock market recovery from the shock of these adverse factors will be slow. There is a growing voice that we must move away from the optimistic view based on past data where rapid recovery occurred after major adverse events like wars or economic crises.

On the 26th, the securities industry is focusing on analyzing stock market recovery rate data from the 2014 Crimea crisis, as Russia's invasion of Ukraine is likely to follow a similar course. During the 15 trading days of the Crimea crisis, the Standard & Poor's 500 (S&P 500) fell by 1%, while KOSPI dropped by 3%. Considering the Korea discount, the domestic index decline was larger. Since 1980, the average one-day decline of the S&P 500 due to geopolitical events was -0.9%, with an average total decline of -3.8% over an average decline period of 13 days. KOSPI also experienced larger declines and longer recovery periods.

During the 1990 Iraq invasion of Kuwait, a regional conflict similar to the Ukraine situation, the Dow Jones Industrial Average fell by 13.3% but rebounded by 2.3% after three months and 16.3% after six months. KOSPI showed a similar pattern. After hitting a low of 1,457.64 on March 19, 2020, amid peak COVID-19 fears, it rose 51% to 2,195.69 by June 10, just over three months later, and continued to rise, surpassing 3,000 last year to reach an all-time high. During the IMF (International Monetary Fund) foreign exchange crisis, KOSPI fell to 351.45 on December 24, 1997, about 20 days after the bailout application, then rebounded to 567.38 by January 31, 1998, about a month later.

However, there is also a strong voice cautioning against excessive optimism based solely on past data. Investment bank JP Morgan stated, "History does not provide guidance on how markets will react to any specific conflict," and advised that "investors should maintain a defensive stance."

The slow recovery of the stock market frozen by the current Russia-Ukraine conflict is largely because inflation, interest rate hikes, and corporate earnings pose greater risks than the war itself.

In particular, the trend in Korean corporate profits is concerning, with continuous downward revisions in growth rates. The global 12-month forward earnings per share (EPS) was revised upward by +0.9% compared to last month. By country, Europe (+1.7%), the U.S. (+0.7%), and Japan (+0.4%) saw upward revisions, while China (-1.0%), Hong Kong (-0.6%), and Korea (-0.2%) experienced downward revisions. Notably, the 2022 operating profit forecast for Korean companies was revised downward by -0.7% from last week to 226 trillion won (based on 227 companies with consensus estimates).

However, the low price-to-earnings ratio (PER) of Korean companies is a driving force that at least helps defend the stock market's downside.

Kang Bong-ju, a researcher at Meritz Securities, explained, "Although Korean corporate profits are being revised downward faster than those of major countries, much of the corresponding PER decline has already been reflected. Even if the stock market shows mixed trends for the time being, stocks whose prices have fallen to levels below the historical average PER will show higher returns than the index."

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