KOSPI Wavers Around 2300 Level... Time Needed Until Trend Reversal

High Interest Rate Environment and Geopolitical Crises Increase Downward Pressure on Stock Market
Best Buying Timing Occurs When 'Stock Price Correction + Government Bond Yield Decline' Combination Appears

[Image source=Yonhap News]

The KOSPI continues to struggle, even wavering below the 2300 level. Amid escalating geopolitical risks and growing downside risks to the economy, the high interest rate environment is adding to the asset market risk premium, leading to forecasts that it will take time before the stock market trend reverses.

At 9:40 a.m. on the 27th, the KOSPI recorded 2294.33, down 4.75 points (0.21%) from the previous day. The KOSDAQ fell 4.54 points (0.61%) to 739.31. Both the KOSPI and KOSDAQ started higher due to rebound buying following the sharp drop the previous day but failed to maintain the upward momentum and have been fluctuating since.

The KOSPI broke below the 2300 mark after recording its largest drop this year the previous day. It was the first time in about 10 months since January 6 (2289.97) that the KOSPI fell below 2300. This means it has given up most of its gains for the year and returned to the level seen at the beginning of the year.

Geopolitical issues and high interest rates are weighing on the stock market. Kim Hyung-ryeol, Head of Research at Kyobo Securities, analyzed, "In a situation where geopolitical risks, economic activity contraction, and downside risks to the economy are increasing, the high interest rate environment is raising the risk premium in asset markets."

The continued rise in U.S. Treasury yields is increasing downward pressure on the stock market. The U.S. 10-year Treasury yield surpassed 5% intraday on the 19th, exceeding 5% for the first time in 16 years since July 2007, and has been hovering near that level. Ko Tae-bong, Head of Research at Hi Investment & Securities, said, "Long-term yields have remained high due to inflation, prolonged high benchmark interest rates, U.S. government fiscal spending issues, and the still-strong U.S. economic conditions, which triggered the stock market correction in the third quarter. If yields stabilize due to downward stabilization of the economy and inflation, and political solutions to fiscal issues, one threat to the stock market will be removed."

The unpredictable war between Israel and the Palestinian militant group Hamas has recently become the biggest source of anxiety for the stock market. News of Israel's raid on the Gaza Strip also contributed to the sharp drop in stock prices the previous day. The extent to which the war affects the economy and oil prices will likely determine the degree of its impact on the stock market. Kim Sang-hoon and Kim Dong-won of KB Securities Research Center said, "In the past, wars acted as short-term negative factors but were often followed by positive rebounds. The stock market showed weakness mainly when oil price increases amid inflation concerns negatively affected inflation and the economic cycle. In conclusion, unless the war causes a sharp rise in oil prices, the stock market will ultimately follow the economic cycle." They added, "However, if upward pressure on oil prices persists and affects inflation, there is some possibility of a negative impact on the economic cycle."

Although there may be expectations of a rebound following the short-term sharp decline, it is expected to take time before a trend reversal occurs. Kim Hyung-ryeol said, "Given the large short-term drop, expectations for a rebound are high, but it is expected to take time for a trend reversal." Seo Sang-young, Director at Mirae Asset Securities, said, "Overall, the market is in an oversold zone, so it is naturally more sensitive to positive factors than negative ones, increasing the possibility of a rebound. Since many negative factors have already been priced in, unless there is a sudden surge in interest rates or hawkish remarks at the U.S. Federal Open Market Committee (FOMC) meeting scheduled for the 2nd of next month, the likelihood of a further sharp decline is low."

There are also forecasts that the market will remain in a box range until the first half of next year. Seo Sang-young said, "Since the U.S. economy is expected to perform poorly in the fourth quarter, both upward and downward movements will be limited, resulting in a box range market that could continue until the first half of next year."

The focus for buying timing is expected to be on interest rate stabilization. Kim Sang-hoon and Kim Dong-won said, "There may be room for a short-term rebound, but until the U.S. Federal Reserve ends its tightening, stock prices will show uncertain movements. The buying timing will be when a combination of 'stock price correction + decline in Treasury yields' occurs." Kim Hyung-ryeol added, "Relative valuation attractiveness compared to bonds is not high, making it difficult to receive continuous liquidity support, and downward revisions to 2024 earnings forecasts mean valuation burdens will not improve significantly. It is a situation where investors should reduce their investment weight to maintain risk management and wait for the timing of interest rate stabilization."

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