Fed's decision expected to have limited impact on Korean stocks

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By Anna J. Park

The U.S. Federal Reserve's announcement at the end of last week that it won't extend a capital relief measure that began at the start of the COVID-19 pandemic seems to be boosting uncertainty in global stock markets that are already volatile due to concerns over rising interest rates as well as growth stocks' valuations.

The U.S. central bank's decision to end the capital relief by the end of this month means that banks cannot exclude government bonds in calculating the supplementary leverage ratio (SLR), which could possibly send jitters throughout global bond markets and cause negative repercussions on stock markets. The end of the SLR rule means that financial institutions have to sell off their holdings of U.S. Treasuries, which is generally interpreted as pressure to raise interest rates.

However, market experts view that the impact of the Fed's decision to stop the banks' eased capital rule will be limited in the Korean stock market.

“As commercial banks hold only about 5 percent of Treasury bonds, I think the end of the eased capital rule won't have a significant impact on the bond market, which in turn is also expected to be limited in the Korean stock market,” said Stephen Lee, an economist at Meritz Securities.

The analyst added that the Korean stock markets' future moves are not likely to be based on the sole variable of the change in the SLR rule.

“The Fed also said that it will comments further on measures to adjust the SLR in an effort to assure that the changes won't disturb market conditions,” the economist said.

Market watchers also point out that as interest rates don't appear set to surge in the near future, investors could favor growth stocks rather than cyclicals, as the outlooks of major global economies are positive.

According to global media outlets, G10 countries' average GDP growth rates are expected at 4.69 percent, the highest since the global financial crisis back in 2008. The Korean economy is also forecast to grow by 3.4 percent, while the Chinese economy's growth is expected at 8 percent.

“During the period of global taper tantrums back in 2013, stock market corrections turned out to be a short-term phenomenon,” Byun Joon-ho, an analyst at Heungkuk Securities, said. “Investors are likely to interpret the hike in interest rates as a sign of a full-fledged economic recovery.”