[Weekly Market Outlook] Strong Dollar and COVID-19 Spread Fears... "Box Range Expected to Continue"

[Asia Economy Reporter Minji Lee] As the number of confirmed cases of the novel coronavirus infection (COVID-19) surges, the decline in the domestic stock market is deepening. Concerns over the economic shock caused by the spread of COVID-19 are also affecting corporate profit forecasts, increasing worries about further declines. The securities industry expects the COVID-19 situation to be unlikely to subside in the short term, continuing a box range trend. NH Investment & Securities projected the KOSPI expected band for the fourth week of February (24?28) to be between 2150 and 2240, Hana Financial Investment forecasted 2160 to 2210, and Cape Investment & Securities anticipated the index to move between 2140 and 2200.

On the 21st, as the possibility of community spread of the novel coronavirus (COVID-19) increased, the KOSPI index opened lower at 2,165.65, down 29.85 points (1.36%) from the previous trading day. The won-dollar exchange rate started the session at 1,205.7 won, up 7.0 won. On this day, dealers are working in the dealing room of Hana Bank in Euljiro, Seoul.
Photo by Moon Honam munonam@

◆ Donggil Noh, Researcher at NH Investment & Securities = Next week, the domestic stock market is expected to be influenced by the spread of COVID-19 in Asian regions outside China. The spread of COVID-19 has passed its peak and is gradually easing. On the 20th, China reported 394 new confirmed cases, with 45 new cases outside Hubei Province. However, new confirmed cases are increasing in Asian regions outside China, such as Japan and Singapore, which is expected to weigh on risk asset investment sentiment.

In fact, after foreign media such as Bloomberg reported South Korea's new confirmed cases on the 20th as major news, foreign investors sold nearly 600 billion KRW worth of KOSPI 200 futures, pulling down the index. Consequently, stock markets in major Asian countries like Hong Kong and Taiwan also declined, reflecting investors' anxiety about COVID-19.

The domestic stock market could rebound if the Federal Reserve's (Fed) accommodative monetary policy and China's economic stimulus measures are implemented. According to the minutes of the January Federal Open Market Committee (FOMC), Fed officials expressed confidence in the U.S. economy, but investors are expecting interest rate cuts within the year. The Chinese government is attempting to mitigate the economic impact of COVID-19 mainly through monetary policy.

◆ Younggyo Yoon, Researcher at Cape Investment & Securities = Although the possibility of a short-term resolution of the COVID-19 situation has decreased, the recent rebound in U.S. economic indicators suggests that the impact on the global real economy will be less than expected. The strong U.S. economic data is expected to lead a recovery in emerging markets. Previously, the Fed raised its growth forecasts for 2020 and 2021 based on the conclusion of trade negotiations with China. Considering the low likelihood of COVID-19 spreading from China to the U.S., the U.S. economic recovery is expected to continue steadily.

If the COVID-19 situation eases, the index rise is expected to be steeper than anticipated. This is because the index adjustment likely occurred due to supply and demand factors rather than major economic indicators (fundamentals). If the index adjustment begins, it is expected that investors should respond by increasing their stock allocation. It is advisable to focus on buying semiconductor, automobile, and China-related consumer goods sectors, which are expected to see significant profit forecast improvements following the COVID-19 situation and a rebound in U.S. consumer demand.

◆ Yonggu Kim, Researcher at Hana Financial Investment = Despite new highs in major U.S. indices and expectations for China's policy stimulus, the domestic stock market is showing sluggish price movements. This is due to concerns over the future impact of COVID-19 on the domestic and international real economy and the shift from a strong dollar to a weak dollar environment (EM Carry trade) causing cracks.

Next week, the market focus is expected to concentrate on domestic and international exchange rate variables. The dollar index has risen sharply, maintaining a strong trend. Exchange rate variables appear to be influenced by the absolute disadvantage in real economic momentum of the Eurozone compared to the U.S., the possibility of weak economic indicators in emerging markets and China due to COVID-19, and the re-ignition of global political and economic uncertainties.

However, if China's high-intensity policy response is implemented early to block potential economic concerns, if Europe's real economy rebounds from the bottom, and if U.S. President Trump introduces fiscal stimulus considering the 2020 election path, the direction of exchange rates is expected to differ from the current trend.

Investment strategy should focus more on the U.S. than China, and on individual stocks rather than the market. Unless the strong dollar trend reverses to weakness and global re-flation trading emerges?selling long-term bonds and buying stocks to prepare for inflation?the leading stocks driving domestic and international markets are unlikely to change. Continued interest should be maintained in IT, automobile export consumer goods sectors, as well as large software and bio stocks.