[Opinion] IMF's Economic Downgrade and Stock Market Rally

The OECD Leading Economic Index is often cited as an indicator to gauge the direction of the global economy. It is a concept that measures a healthy economy by combining 10 leading indicators, including average weekly working hours, new orders, consumer expectations, housing permits, stock prices, and interest rate spreads. Germany's figures rose for three consecutive months starting from the low point in December last year, the Euro Big 4 countries saw a four-month consecutive increase from their low in November, and China experienced a three-month consecutive rise from its low in December. The U.S., however, does not show signs of economic rebound based on the figures, and the manufacturing Purchasing Managers' Index (PMI) for April slightly dropped to 49.2. A PMI below 50 indicates economic contraction.

Meanwhile, with the possibility of a Federal Reserve (Fed) interest rate hike in May being raised, there is curiosity about when the global economy might enter a rebound phase. The International Monetary Fund (IMF) has downgraded the global economic growth rate for 2023 to 2.8% and South Korea's economic growth rate to 1.5%. Despite the Fed's aggressive rate hikes, the average monthly employment over the past six months has been robust at 334,000. Employment is likely to play a defensive role against economic downturn. Strong service demand and the technology innovation cycle also reduce the likelihood of a U.S. recession. European stock markets, including Germany's, have reached 52-week highs.

South Korea's KOSDAQ has recorded the highest global stock market rise since the beginning of the year, defying expert predictions. Even setting aside the leading nature of stock prices, it becomes clear that employment statistics and economic growth rates do not significantly impact stock prices. The stock market is certainly more influenced by future earnings and future interest rates. Besides the intrinsic value of companies, the stock market moves based on liquidity and market sentiment. Contrary to the hawkish tone of global central banks, worldwide liquidity has actually increased. This explains why global stocks, which endured harsh sell-offs last year, have rebounded despite the threat of rising interest rates.

The secondary battery, robotics, and AI sectors, which have heated up the stock market this year, do not represent the entire industry. The stock market's movements cannot be explained solely by changes in corporate fundamentals. Defying the global tightening trend, the People's Bank of China directly injected liquidity into the banking system. The Fed has been raising rates for over a year. Passive quantitative tightening (QT), which involves redeeming maturing bonds, has limitations in reducing liquidity. Although the Fed's bond holdings have decreased, the reserve balances?another important component of the Fed's balance sheet?have remained steady. With real interest rates in major countries currently negative, money is seeking investment opportunities.

During periods of rising interest rates, asset prices may not rise even if real interest rates are negative. The market seems to be moving in anticipation of rate cuts. The price increases in secondary batteries and Bitcoin are positively changing expectations toward the asset market. Lower bank interest rates and expectations of potentially lower rates are causing money to return to asset markets. While expectations of a central bank pivot (rate cuts) are each individual's responsibility, the stock market is engaging in a fashion competition.

Since there has been a big hit in the secondary battery sector, investors interested in stock prices are fully focused on discovering promising stocks. Some companies even have their CEOs actively promoting their firms. POSCO Holdings reported consolidated sales of 84.8 trillion won, operating profit of 4.9 trillion won, and net profit of 3.6 trillion won last year. Compared to the previous year, consolidated sales increased by 11.1%, but operating profit and net profit decreased by 46.7% and 50%, respectively. It is said that corporate net profits will turn around this year, but will profits and sales increase proportionally to this year's surge? Corporate profit and sales growth are very important for a healthy economy. No one knows what will happen this year. Hopefully, there will be no troubles in the asset market.

Jowon Kyung, Professor at UNIST / Director of the Global Industry Cooperation Center

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