[Weekly Market Outlook] Attempt to Stabilize at '2200' Amid Short-Term Volatility... "Focus on China's Policy Response"

[Asia Economy Reporter Oh Ju-yeon] As the spread of the novel coronavirus infection (COVID-19) continues, the stock market is experiencing repeated fluctuations. However, Chinese health authorities and experts expect the peak of the increase in confirmed cases to pass by the end of February, so while there may be short-term volatility, the consensus is that the mid- to long-term upward trend will continue. NH Investment & Securities projected the KOSPI expected band for the third week of February (17-21) to be between 2190 and 2260, Kiwoom Securities forecasted 2190 to 2270, and Hana Financial Investment anticipated a neutral stock price trend between 2200 and 2250.

[Image source=Yonhap News]

◆ Nodonggil, Researcher at NH Investment & Securities = During the past Severe Acute Respiratory Syndrome (SARS) outbreak, the stock market rebound occurred about a month before the peak of the increase in confirmed cases, indicating that the stock market is unlikely to reverse the gains made so far. Although the KOSPI may experience some fluctuations, it is expected to maintain an upward trend due to the global economic recovery and upward revisions in earnings estimates for the semiconductor sector.

The current stock market reflects the global economic recovery. It is similar to the S&P 500’s performance during past recovery periods. Since 1965, the S&P 500 has recorded an average annual return of 19.3% during rebound phases when the OECD Leading Economic Index was below 100. Even excluding recession cases such as the financial crisis or the IT bubble burst, the one-year returns were similar. The S&P 500’s rise rate has slowed from the historical average return of around 15%. While the S&P 500 may experience some volatility during recovery phases, the upward trend is expected to continue.

With the stock price rise, the KOSPI’s 12-month forward PER (price-to-earnings ratio) is currently above 11 times. However, the KOSPI’s 12-month forward EPS (earnings per share) is gradually rebounding after bottoming out. The U.S. stock market is unlikely to experience major fluctuations for the time being, as Federal Reserve Chair Powell’s congressional testimony confirmed the willingness to intervene in the market if volatility increases. The KOSPI is also expected to show a gentle rise amid fluctuations, supported by corporate earnings recovery and expectations of improved export growth in the first quarter. For the existing leading sector, IT, the sentiment burden has somewhat eased due to the market capitalization cap on Samsung Electronics, so it is expected to maintain its leadership.

◆ Seosangyoung, Researcher at Kiwoom Securities = The Korean stock market may see profit-taking early in the week due to concerns about economic slowdown following U.S. economic data results. However, the adjustment is expected to be limited due to expectations of a cut in the People’s Bank of China’s Loan Prime Rate (LPR) announced at 10:30 a.m. Korean time on the 20th. Supported by this, the index is expected to continue rising. However, there is a possibility that the export-import statistics for Korea until the weekend of the 20th may be significantly disappointing, which could lead to giving back gains made later in the week.

Along with these changes, attention should be paid to Walmart and Analog Devices’ earnings and the Federal Reserve officials’ remarks. Walmart’s earnings report will be watched for sales changes due to warm weather at year-end and any adjustments in outlook related to COVID-19 issues. Especially for Analog Devices, considering it is an Apple parts supplier, fluctuations in Apple-related stocks are expected depending on its future outlook comments. The Federal Reserve officials’ remarks are also important as many relate to economic forecasts and monetary policy. Taking this into account, the KOSPI is expected to fluctuate between 2190 and 2270, and the KOSDAQ between 680 and 710.

◆ Kim Yonggu, Researcher at Hana Financial Investment = Market attention is expected to focus on China’s policy response aimed at turning adversity into opportunity. Considering the upcoming National People’s Congress (NPC) in early March, the period after mid-February is a golden time for policy momentum. This NPC mainly serves as a bridge between mitigating the future real economy aftershocks of the current COVID-19 shock and the 2020 Xiaokang (moderately prosperous) society declaration (achieving per capita income of $10,000, doubling GDP compared to 2010, and doubling urban household worker income compared to 2012).

Considering the previous 2020 real GDP growth target of 6% for the Xiaokang society development and the possibility of a 1-2% growth rate decline due to the sudden COVID shock, the government’s policy target is expected to be toned up to maintain a 7-8% growth rate.

The investment strategy focus should be on “eyes on the U.S., ears on China.” The prerequisite for a strong dollar weakening and the revival of global reflation trading flows is the early implementation of China’s high-intensity policy momentum. Unless this change in the situation is realized, the possibility of a leadership change in domestic and international stock market portfolio strategies in the short term is minimal.