Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Bottoming out or temporary rebound?
By Lee Min-hyung
Analysts expect no more market freefall despite foreign selloff
By Lee Min-hyung
With lingering uncertainties over global stock markets amid the rapid spread of the COVID-19 in the U.S. and Europe, a lot of attention is being paid to the future course of the Korean stock market which has shown signs of stabilization after a weeks-long crash.
Some argue that the worst is yet to come as it will take some time for the coronavirus fallout to make its way through the real economy, but a majority of Korean analysts expect “no more stock market freefall,” citing a global wave of economic rescue packages.
They say that governments' unprecedented preemptive steps to provide liquidity into the markets will stop the virus concern from escalating into, at worst, financial paralysis.
In times of previous financial turmoil ― including the 2008 global financial crisis and the 1997-98 Asian financial crisis ― the KOSPI dropped by more than 50 percent from its previous high. The index nosedived below the 1,000-mark to reach 938 points Oct. 24, 2008, in the aftermath of deepening subprime mortgage crisis from the U.S.
The main bourse has recently shown signs of following a similar pattern by steeply dropping by about 30 percent to below the 1,500-mark in about a month after the coronavirus swept across the nation, and a sense of fear from the public and investors reached its peak.
The index, however, has in recent days bounced back from the shock to recover to the 1,700-range.
Market experts voiced their consensus that chances are slim that the index will return to a losing streak and sink further to similar levels of previous global financial crises.
“The chance for the worst-case scenario is merely 10 to 20 percent, as governments ― led by the U.S. ― remain more than agile in introducing a set of strong financial stabilization policies so as not to repeat the fiasco of 2008,” said Meritz Securities economist Kang Bong-joo.
“The Korean government is also taking similar proactive measures, such as the Bank of Korea's (BOK) recent decision to supply unlimited liquidity to the market,” he said. “One big difference between the status quo and the 2008 crisis is that the financial system is not paralyzed now, even if the virus' impact on the real economy appears to be very serious.”
But he underlined the need for the financial authorities and investors to brace for the possibility of additional drops on the KOSPI, as the virus is still rapidly spreading across the U.S. and Europe.
“If the virus lasts longer than expected, chances are some companies may go bankrupt, as the pandemic fear forces workers to stay at home,” Kang said. On top of that, the Korean stock market may fall victim to uncertainties regarding a possible market crash in the U.S., he added.
Even if Korea's confirmed cases of the virus are on the rapid decline, a sense of virus-related fears remains in place, as is shown from foreigners' unceasing selling spree of local stocks.
Starting March 5, foreign investors have gone on a mass selling of Korean stocks worth more than 11 trillion won over 18 consecutive trading days.
Stock prices of major KOSPI-listed firms have plummeted in line with the foreign capital exodus.
But small individual investors have sought to take this as an opportunity to purchase blue chip stocks ― such as Samsung Electronics ― at a low price.
According to the Korea Exchange, investors' deposit on the KOSPI have topped 45 trillion won ($36.93 billion), and this has raised a sense of hope that the capital can be used to offset foreigners' outflow.
Korea Capital Market Institute economist Hwang Sei-woon said this definitely plays a part in mitigating KOSPI's additional fall.
“Individual investors also have experience to generate revenues at times of financial crisis,” he said. “If a wave of fear persisted here, the main bourse must have dropped further. But this was not the case in recent trading days.”
Despite the positive signal, foreigners will continue their selling spree until the virus spread in the U.S. shows signs of waning, according to Hwang.
“The virus fear has yet to reach its peak in the U.S., so foreign investors will keep on selling amid a lingering sense of virus-driven global uncertainties.”
Some experts said that the market recovery of that last few days should be taken as a temporary rebound before another substantial fall.
“You have to pay attention to how badly the virus fallout will end up affecting the real economy. You have to realize that the situation is much more serious than it looks,” a ranking executive at one of the nation's major financial groups told The Korea Times.
“Once the virus' impact on the economy becomes more pronounced, it is highly probable that we will see another market crash,” he added.