Will the Chaotic KOSPI Recover to 2500?... Pausing Again Amid US-China Economic Uncertainties

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] The domestic stock market in December is expected to show a pattern of consolidation once again. Ahead of the U.S. Federal Reserve's (Fed) Federal Open Market Committee (FOMC) meeting scheduled for December 13-14 (local time), there is anticipation of a policy pivot, but at the same time, downside factors such as economic uncertainties in the U.S. and China, sluggish domestic exports, and valuation pressures make it difficult to find a clear direction.

On the 5th, the securities industry forecasted that the domestic stock market in December will again show a consolidation pattern, with some direction gradually emerging after mid-month. This is based on the judgment that amid the clear coexistence of upward and downward factors, uncertainty about a recession will continue to weigh on the index.

Fed Chair Jerome Powell said in a speech at the Brookings Institution, a U.S. think tank, on the 30th of last month, "The pace of interest rate hikes could be adjusted as early as December," which has raised market expectations for a pivot. This statement has been interpreted to mean that the Fed may raise rates by a big step (0.50 percentage points) instead of a giant step (0.75 percentage points) at the December FOMC.

Kim Young-hwan, a researcher at NH Investment & Securities, said, "Since Chair Powell has hinted at the December FOMC, if inflation does not significantly exceed expectations, investors are likely to maintain an optimistic outlook on Fed policy for the time being," and predicted the KOSPI's fluctuation range in the first week of December to be between 2420 and 2540. However, he pointed out sluggish domestic exports and valuation pressures as downside factors.

Jang Hyun-chul, a researcher at Korea Investment & Securities, also explained, "Despite the continued downward revision of corporate earnings forecasts, the Korean stock market has escaped the oversold zone thanks to the stability of the won-dollar exchange rate and is the only major global stock market with valuations above the past 10-year average," adding, "Considering that exports have entered a contraction phase and that the semiconductor market turnaround will take time, the market has entered a zone where valuation pressures can be felt."

In November, Korea's export value was $51.9 billion, down 14% year-on-year, marking a negative growth rate for two consecutive months. The annual trade deficit reached $42.6 billion, the largest ever recorded. Lim Hye-yoon of Hanwha Investment & Securities said, "Due to the global demand slowdown, the export prices of major items are falling, and exports to China are also decreasing, intensifying Korea's export slump," and predicted, "Considering the global economic slowdown and base effects, exports in the first half of next year are likely to decrease by more than 10% compared to this year, and the export slump of semiconductors and petrochemicals, which led last year's export boom, will deepen."

Economic uncertainties in the U.S. and China are also expected to weigh on the domestic stock market. Kim Yu-mi, a researcher at Kiwoom Securities, forecasted, "The pace of tightening is somewhat taken for granted, and attention will shift to the terminal rate level and the direction of the U.S. economy." She added, "Although some believe concerns about a U.S. recession are already reflected in the financial markets, the side effects of rate hikes have not yet fully materialized," pointing out, "Uncertainty about a recession could be a burden, and demand for safe-haven assets may limit the decline in the dollar's value."

The fact that the U.S. Institute for Supply Management (ISM) manufacturing Purchasing Managers' Index (PMI) fell below the baseline of 50 for the first time in 30 months is also a concern. Seo Jeong-hoon, a researcher at Samsung Securities, said, "Since one of the reputable economic indicators has officially signaled a recession, the stock market, which has rebounded relying only on expectations of peaking inflation, is likely to reflect on itself."

Ultimately, the domestic stock market in December is expected to be significantly influenced by various economic indicator releases. On the 5th, Europe's October retail sales index, U.S. October manufacturing orders, and November U.S. ISM index will be announced. On the 6th, the U.S. October trade balance is scheduled for release, and on the 9th, the November producer price indices of China and the U.S. will be published.

China's COVID-19 lockdown policy is also a focus of attention. Kim Dae-jun, head of the investment strategy team at Korea Investment & Securities, analyzed, "Recently, the resurgence of COVID-19 in China has strongly shaken the economy, and excessive lockdowns based on political decisions have halted production and consumption, increasing economic uncertainty." He added, "Especially since the 'zero COVID' policy stance is unlikely to change for the time being, the preference for safe-haven assets will continue," evaluating, "This leads to concerns about global demand weakness and may increase preference for the dollar."

Park Hee-chan, a researcher at Mirae Asset Securities, said, "With the won-dollar exchange rate falling below 1,300 won, the stage has been reached where the stock price rise linked to dollar weakness feels limited," and assessed, "For the stock market to rebound further, other factors are needed, and currently, the only potential is China's transition to 'With COVID'."

The benefits from the transition to 'With COVID' are generally considered premature. Ryu Jin-i, a researcher at Hi Investment & Securities, said, "The COVID-19 situation in China is crucial," and analyzed, "Until herd immunity is reached or quarantine policies enter the 'With COVID' phase, expected anti-government protests and harsh responses to them, as well as a sharp increase in COVID-19 deaths, are likely to significantly delay China's reopening (resumption of economic activities)."

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