Eyes on the 'Powell Speech'·Tightening Imminent·Default Crisis 'Turning Point'... Will KOSPI Slide to 2500?

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] The domestic stock market is holding its breath as it watches the U.S. Federal Open Market Committee (FOMC). With Federal Reserve (Fed) Chair Jerome Powell having signaled a rate hike at the March FOMC, market participants are on high alert as downward pressure on the stock market is expected to increase ahead of the 'tightening phase.' Especially with the possibility of a default due to Russia's sovereign bond maturity schedule, the global financial market is expected to be significantly shaken, making this week a turning point.

◆'0.25 percentage points vs 0.50 percentage points' = According to the financial investment industry on the 15th, the results of the March FOMC will be announced at dawn on the 17th Korean time. A 25 basis points (0.25 percentage points) rate hike is highly likely. This would be the first rate hike since the spread of COVID-19 in 2020. So far, the Fed has indicated that it will raise the benchmark interest rate by 0.25 percentage points at the March FOMC meeting.

Seojeonghoon, a researcher at Samsung Securities, said, "Although it was expected that central banks would show flexibility in their tightening moves due to the Russia situation, central banks that have witnessed alarming inflation levels have declared they will continue on their path," adding, "A 25 basis points hike is almost certain at this week's FOMC." Ahn Youngjin, a researcher at SK Securities, also predicted, "The opinion for a 50 basis points (0.50 percentage points) hike, which once shocked the market, has completely disappeared, and a 25 basis points hike is very likely." Heo Jinwook, a researcher at Samsung Securities, also forecasted, "Given Chair Powell's earlier congressional monetary policy report, the March FOMC is unlikely to deliver an unexpected hawkish shock to the market."

However, as geopolitical tensions between Russia and Ukraine persist and inflation may be prolonged, there are cautious speculations that the Fed might surprise the market with a 'big step' (0.5 percentage points).

Lee Kyungmin, a researcher at Daishin Securities, said, "With last month's CPI (Consumer Price Index) leveling up to 7.9% and the possibility of additional inflationary pressure due to the sharp rise in raw material prices caused by the Ukraine crisis, the Fed may take a more hawkish stance," adding, "Given the possibility that the Ukraine situation could stimulate upward inflationary pressure, the possibility of a 50 basis points rate hike by the Fed in March cannot be ruled out."

◆Russia Default and Buying at Lower Prices Rather Than Cutting Losses at 2500= The problem is the high likelihood that Russia will declare a default. The Russian economy is significantly shaken, with the ruble plunging about 50% and the suspension period for stock trading extended from 14 to 18 days. JP Morgan has raised the possibility that Russia may default by failing to repay bonds maturing on the 16th. The International Monetary Fund (IMF) also pointed out that a Russian default is not an impossible scenario.

Kim Younghwan, a researcher at NH Investment & Securities, said, "We must be mindful of the high volatility that may continue due to the default risk related to Russia's sovereign bond maturity schedule (on the 16th) and concerns about tightening at the March FOMC."

The securities industry recommends a volatility investment strategy: if the KOSPI enters the 2500 range, increase weighting; if it fluctuates above the 2600 level, delay increasing weighting and maintain a wait-and-see stance. Although domestic stock market volatility will increase, the judgment is that buying at lower prices below 2600 is better than cutting losses.

Lee Kyungmin of Daishin Securities emphasized, "If the KOSPI enters the 2500 range by preemptively reflecting the Fed's big step during the week, a strategy to increase weighting by utilizing volatility will be necessary," adding, "On the other hand, if the rate hike is 25 basis points and some rate freezes are expected, leading to stability and fluctuations above the 2600 level, delay the timing of increasing weighting."

Shinyoung Securities also emphasized that there is no practical benefit to selling stocks at the KOSPI 2600 level. The three reasons cited were ▲the index decline has proceeded to a technically oversold phase ▲solid economic reopening momentum despite inflation concerns ▲major countries' dividend yields rising to 2-3% due to recent sharp stock price drops. Park Soyeon, a researcher at Shinyoung Securities, explained, "Current risk indicators have all reached oversold territory, which has only happened three times before: during the 2011 European debt crisis, the 2015 emerging market crisis, and the 2020 COVID-19 crisis," adding, "Both emerging and developed countries are expected to have profit growth rates of 8-9% this year, and unless there is a profit decline, the stock prices are clearly attractive."

◆Recommendation for Conservative Response= However, the securities industry generally expects that the KOSPI 2600 level will not easily collapse. Seojeonghoon of Samsung Securities said, "The valuation multiple (corporate value relative to profitability) of the domestic stock market has been significantly compressed, and the index's earnings outlook shows downward rigidity, so the possibility of a sharp correction is assessed to be low," emphasizing, "The current 'real tightening' is more appropriately perceived as a factor limiting the upside of stock prices."

Seo Sangyoung, a researcher at Mirae Asset Securities, said, "Considering that the Fed's very aggressive monetary policy could stimulate stagflation concerns, the Fed will raise rates but will not take aggressive actions contrary to market fears," and forecasted, "Thanks to this, risk assets such as the stock market will rebound after the FOMC."

However, investment advice continues to recommend a conservative approach. This is because it is difficult to predict what Chair Powell will say about inflation rates and the expected number of rate hikes. The possibility of additional Fed rate hikes is expected to further dampen investor sentiment.

Ahn Youngjin of SK Securities said, "The probability of a 50 basis points rate hike at the May FOMC is as high as 34%, and the opinion for a 100 basis points hike by June is 41.4%, as inflation shooting and uncertainty caused by the Russia-Ukraine war have not been resolved," emphasizing, "Rather than the benchmark rate decision, we need to find hints about future monetary policy from the remarks of Chair Powell and other Fed officials afterwards."

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