[Good Morning Stock Market] COVID-19, Focus on Government Stimulus Rather Than Excessive Pessimism

[Image source=Yonhap News]

[Asia Economy Reporter Koo Eun-mo] As the novel coronavirus infection (COVID-19) situation shows little sign of easing, an analysis suggests that instead of excessive pessimism, focus should be placed on the government stimulus measures that will become visible in the future.

◆Soyeon Park & Daejun Kim, Researchers at Korea Investment & Securities=When fear becomes widespread, the market begins to seek a bottom. Although the financial market remains unsettled due to the COVID-19 issue, from now on, it is necessary to focus on the government stimulus measures that will become visible rather than excessive pessimism. China has yet to announce any tangible policies, but additional monetary easing is highly likely, and major stimulus discussions will take place at the Two Sessions in March. In Korea, the possibility of a base interest rate cut has increased, and a comprehensive economic stimulus package is expected to be announced soon. In the U.S., the direct impact of COVID-19 is not significant, but the futures market already reflects about a 50% probability of an interest rate cut in the first half of the year. This is why the relative strength of growth stocks continues to strengthen.

In March, shareholder meetings of major companies such as Samsung Electronics and Hanjin Kal are scheduled. With the recent revision of the 5% rule and an increase in stewardship code signatories, voices for strengthening shareholder rights, mainly from institutional investors, are growing. Although the surrounding environment of the stock market remains bleak, new momentum can be expected. The expected KOSPI range is 2050 to 2200 points, with a 12-month forward price-to-earnings ratio (PER) of 10.25 to 11.00 times and a price-to-book ratio (PBR) of 0.82 to 0.88 times based on the universe.

◆Myeonggan Yoo, Researcher at Mirae Asset Daewoo=Last weekend, as the number of confirmed COVID-19 cases in Korea surged, stock market volatility expanded, and the KOSPI fell 3.9% (83.8 points) on Monday. This was the second-largest drop since 2012. As the rate of increase in confirmed cases slowed, the KOSPI rebounded 1.2% on Tuesday.

The KOSPI’s 12-month forward price-to-earnings ratio (PER) fell to 10.6 times before slightly rising to 10.7 times. Since last year, when the KOSPI experienced short-term corrections, the PER bottomed between 10.0 and 10.6 times. If the earnings momentum of domestic companies is not significantly damaged, the scope for further declines is likely limited.

Also, during the SARS outbreak in the past, the KOSPI did not react to the lagging downward revisions of earnings per share (EPS). From the peak in January 2003 to the low in March, the KOSPI fell 23%. During the same period, the PER dropped 22% from 6.6 times to 5.1 times, while EPS was only revised downward by 0.9%. Subsequently, by the end of May, EPS was revised down by 8.7%, but the KOSPI rose 23%, recovering the decline.