Ample liquidity to power up KOSPI over 2,600 by year-end

Dealers at Hana Bank work at its headquarters in Seoul, Friday. Yonhap

By Lee Min-hyung

The benchmark KOSPI is expected to reach an all-time high of 2,600 before the end of this year, buoyed by ample liquidity in the market and diminishing signs of external risk factors, analysts said Friday.

The previous high of the main bourse was 2,598 on Jan. 29, 2018. Market pundits expected the index to continue its strong rally throughout the year and reach the new historic level by then.

The KOSPI will continue on its upward trajectory given the immense amount of liquidity that the government has pumped into the main bourse to protect against the coronavirus-induced economic meltdown, they said.

“The KOSPI will definitely hit the new high of 2,600 before the end of 2020, as no clear external uncertainties have been detected to block the upward momentum of the local stock market,” said Hwang Sei-woon, economist at the Korea Capital Market Institute.

Despite the rosy outlook, some critics have expressed concerns recently that the market could be overshooting, seeing just a temporary surge in the stock price.

According to the analyst, it could be said that the stock market is overheated now, but that does not necessarily mean it will enter an adjustment period which will see prices fall again soon.

“The market will experience a slight short-term adjustment of a drop of around 100 to 200 points from the status quo, but the index will return to the bullishly ascending momentum again,” he said.

The economist also argued that a dwindling sign of crucial external risks ― such as a trade war between the United States and China ― would also back up the bullish run of local stocks.

“The stock market will experience big falls only if the world's two largest economies rekindle their years-long trade dispute into a worrying level, but the feasibility of that remains slim for now,” he said.

The coronavirus factor will no longer hold back growth of the stock market, according to him.

“The KOSPI already suffered major shocks from the global spread of COVID-19 in the first half of this year, so any second or third wave of virus infections is unlikely to drive down the ongoing rally of stocks here,” he said.

The weakening dollar against the Korean won also casts a positive influence on local stocks, according to Park Sang-hyun, an analyst at HI Investment & Securities.

“Investors prefer risky assets at a time when the dollar depreciates, and this also has an effect on foreign investors' movement in the local stock market,” he said.

Starting from June, the won-dollar exchange rate has been on the decline on the U.S. Fed's series of monetary easing measures to boost liquidity against the virus-sparked economic downturn.

The recovery speed of the Chinese economy will determine KOSPI's stable rally this year, according to the economist.

“The Korean stock market cannot extend its winning streak simply by resorting to expectations of an economic rebound here,” he said. “We need recovery in the economic fundamentals, which is heavily reliant on the Chinese economy.”

Korea is an export-driven economy, so recovery in exports here will determine whether there is an additional rally of the stock market, according to the analyst.

“The key factor determining the speed of export recovery is definitely the Chinese economy,” he said.