[Good Morning Stock Market] "Market Impact Will Vary Depending on Supplementary Budget Size and Funding Methods"

[Image source=Yonhap News]

[Asia Economy Reporter Koo Eun-mo] The fear of the spread of the novel coronavirus infection (COVID-19) is weighing heavily on investor sentiment, striking not only South Korea but also global stock markets. As a result, market attention is focused on the government's supplementary budget (추경). Looking at past cases, supplementary budgets have generally had a positive impact on the stock market. However, the effect on the market is expected to vary depending on the size of the supplementary budget and the method of securing funds. Meanwhile, although the KOSPI has entered a low-point staggered buying zone, it has been diagnosed that confirmation of overcoming the pandemic fear should come first.

◆Soyeon Park, Researcher at Korea Investment & Securities=Looking at past cases, supplementary budgets have generally acted positively on the stock market. Of course, it is impossible to measure the direct effect of the supplementary budget to some extent, and there is also the possibility that a base effect appeared after the economic contraction. However, for whatever reason, most KOSPI indices showed a rebound about a month after the supplementary budget was formulated. In particular, the rebound in the stock market after the supplementary budget related to the current epidemic situation was larger than expected.

During the outbreaks of SARS (Severe Acute Respiratory Syndrome) and MERS (Middle East Respiratory Syndrome), the KOSPI showed a steady upward trend after the second supplementary budget in 2003 and the supplementary budget in 2015. After the SARS outbreak in November 2002, the KOSPI fell 11.2% over four months, and during MERS in May 2015, the KOSPI fell 9.8% over four months. However, after the supplementary budgets related to the epidemic, from November 2003 to April 2004 and from September to December 2015, the KOSPI rose by 8.9% and 2.5%, respectively.

Looking at past cases similar in size to the expected supplementary budget this time, the results are not bad. After the supplementary budget of more than 6 trillion won, currently discussed in the market, was formulated, the KOSPI continued its upward trend. After large-scale supplementary budgets in the past, the KOSPI rose by about 7.2% on average over 200 trading days.

However, there are concerns related to the formulation of the supplementary budget. One is the lack of appropriate funds. There are three main ways to secure funds for the supplementary budget: utilization of surplus funds, issuance of government bonds, and tax increases. However, last year's global surplus funds were only 2.1 trillion won, the lowest since 2014, and only the portion remaining after use for local government grants and public fund repayments can be spent. Also, due to consumption and investment contraction caused by economic slowdown, tax increases are unlikely.

Therefore, issuing government bonds is inevitable to secure funds for the supplementary budget. The government has already announced that it will issue more than 60 trillion won in deficit bonds while preparing a super budget of 512 trillion won this year. Adding the supplementary budget will increase the scale of deficit bond issuance, which could intensify concerns about fiscal soundness deterioration.

In conclusion, although the stock market showed a gradual rebound after the supplementary budget in the past, the market impact of this supplementary budget is expected to vary depending on whether its size will be as large as expected and how the funds will be secured.

◆Seokhyun Park, Researcher at KTB Investment & Securities=The government is rushing to formulate a supplementary budget in response to the COVID-19 situation, and it is expected to pass the National Assembly soon. The early submission and approval of the supplementary budget bill will help stabilize investor sentiment.

However, since the effect of the supplementary budget is expected to be limited to absorbing some of the shocks to economic growth and corporate activities from a fundamental perspective, its actual market influence is likely to be limited. Above all, five supplementary budgets repeated annually from 2015 to last year had little impact on the KOSPI, and it is necessary to focus more on the global stock market trends and foreign investor trading trends during the same period, which were closely linked to the KOSPI.

Therefore, expectations for the supplementary budget effect to materialize in March should be set low, and attention should be paid to whether concerns about the global spread of COVID-19 can be alleviated.

The intraday low of the KOSPI at 2049 points yesterday corresponds to a 10% correction from the intraday high of 2277 points this year. It is judged to have entered a low-point staggered buying zone, and additional corrections should avoid chasing sales.

However, since the KOSPI has shown a movement more closely linked to the global stock prices (MSCI World Index) through foreign investor trading trends since the beginning of this year, and the global stock markets are still exposed to uncertainties caused by the COVID-19 situation to varying degrees, it is necessary to prioritize the confirmation process of overcoming the global pandemic fear along with the domestic COVID-19 situation development. Excessive pessimism should be avoided, but a gradual approach extending the staggered buying period until mid-March is recommended.