"Was the Trump Risk Overblown? KOSPI's January Rally Raises Annual Expectations"

Despite concerns such as the so-called 'Trump risk,' the domestic stock market has shown strength this year, which is being cited as a factor raising expectations for the stock market in 2025. Since 2000, there have only been three instances when the KOSPI Index rose in January but ended the year lower. Similarly, European stock markets have also shown strength from the beginning of the year, driven by base effects and the impact of interest rate cuts.

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On January 23, Byun Junho, a researcher at IBK Investment & Securities, stated in his report "Implications of the Strong Performance of Korean and European Stock Markets Since the Beginning of the Year" that "the strong performance of Korean and European stock markets since the start of the year has been particularly notable." Byun emphasized, "The stock market's performance in January often serves as a precursor for the market environment throughout the year," and pointed out, "Since 2000, in 79% of cases, a rise in the KOSPI Index in January has led to an annual increase." The three cases where the market rose in January but fell over the year were only during major events: the 2002 credit card crisis, the 2022 Southern European debt crisis and the downgrade of the US credit rating, and the 2018 US-China trade war.

Byun particularly highlighted the early-year strength of Korean and European stock markets in terms of: ▲preemptive reflection of economic concerns ▲monetary policy ▲preemptive reflection of the Trump risk ▲surprises in the US Institute for Supply Management (ISM) Manufacturing Index. First, he explained, "While Europe has experienced a sharp deterioration in economic sentiment since 2023 and Korea since the second half of last year, it is important to note that concerns about economic downturns have already been priced into the market. Therefore, expectations for economic improvement in the second half of this year could emerge in both Europe and Korea."

Byun added, "Although Korea's growth rate is expected to slow compared to last year, if we break it down by period, the market is likely to see a 'low in the first half, high in the second half' pattern, with stock prices rising preemptively in the first half on the back of expectations for improvement in the latter half." While economic momentum is currently slowing, major economic indicators, including the Business Survey Index (BSI) for manufacturing and the Consumer Sentiment Index, are expected to bottom out in the first half. He assessed, "Exports may remain sluggish through the first half, but considering various factors, there is a high possibility of gradual improvement after the second half."

Unlike other regions, Europe is also expected to see growth improve this year. Byun predicted, "Base effects and expectations of interest rate cuts by the European Central Bank (ECB) will have a positive impact on economic sentiment."

Additionally, the fact that the Bank of Korea and the ECB are expected to be more proactive than the US Federal Reserve (Fed) in cutting rates this year has also been cited as a reason for the relative strength of the Korean and European stock markets. Byun explained, "Rising expectations for rate cuts can stimulate economic sentiment more quickly. While the US market has priced in one or two rate cuts this year, Korea has priced in about three, and Europe four."

The aftereffects of Donald Trump’s inauguration as US president, with his 'America First' policy, are also believed to have already been largely priced into the stock market. Byun pointed out, "Both Europe and Korea experienced a downturn in their stock markets last fall due to risks associated with Trump’s policies." At that time, major export countries such as Europe (centered on Germany), China, Korea, and Mexico saw a significant temporary drop in their stock markets. In particular, the domestic market was significantly marginalized due to an excessive gap in returns compared to the US market.

Byun analyzed, "A significant portion of the Trump risk was already reflected in the second half of last year, and it does not appear likely that these concerns will expand much further." Although Trump was expected to issue over 100 executive orders on his first day in office, the actual number was only 46. While this is much higher than the 17 orders issued in the first week of his first term, it still fell short of market expectations.

He added, "Looking at the announced measures, there were no significant issues that could greatly impact financial markets, such as universal tariffs, China regulations, or cryptocurrency market issues. Most of the issues were local domestic matters in the US." He emphasized, "This suggests that major external concerns regarding Trump’s policies may still be subject to adjustment, change, or may not be implemented at all. Even if they are implemented, they are likely to proceed gradually or only partially."

He further noted, "As the scale and content of the measures turned out to be more muted than feared, the decline in the domestic stock market was limited, and the rebound has actually expanded." He pointed out, "This demonstrates that market concerns over Trump’s impact on financial markets were excessive and implies that the previous sharp decline and marginalization of the domestic stock market may be resolved."

Finally, the surprise in the US ISM Manufacturing Index for December, released earlier this month, was also analyzed to have had a positive impact on global stock markets, including those in Korea and Europe. While the ISM Manufacturing Index still remains below the baseline of 50, it continues to show a rebound trend. Byun explained, "Since Trump’s victory in the presidential election last November, expectations for US manufacturing under the new Trump administration have been recovering." This is also expected to have a positive effect on exports from major global exporters such as Germany and Korea.

He stressed that the ISM Manufacturing Index serves as a key leading indicator for domestic exports, noting, "It is worth paying attention to the tendency for the ISM Manufacturing Index to rise in the first year of a new US president’s term." He added, "This is a factor that increases the likelihood of a rebound in the ISM Manufacturing Index this year, and it means that the slowdown in domestic exports may not be as severe and could provide important support for export improvement in the second half, albeit with some time lag."

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