[Weekly Market Outlook] KOSPI Settled Above 2500, Will the Record High Rally Continue?

[Asia Economy Reporter Oh Ju-yeon] In the third week of November (16th-20th), the KOSPI stabilized around the 2500 level, maintaining a solid trend despite the surge in COVID-19 cases. Market attention is focused on whether there will be some correction due to the recent sharp rise in the index or if it will break the previous high through an additional rally. Although there are signs of overheating in the short term, the KOSPI is only about 2% away from its all-time high of 2607 points, raising the possibility of climbing to the 2600 level.

[Image source=Yonhap News]

On the 22nd, NH Investment & Securities projected the KOSPI range for the fourth week of November (23rd-27th) to be between 2500 and 2600. Expectations for COVID-19 vaccine development, improvements in emerging market economies, and foreign capital inflows were cited as factors supporting the rise, while U.S. state-level re-lockdown measures and signs of stock market overheating were mentioned as downward pressures.

Researcher Dong-gil Noh of NH Investment & Securities said, "From November 1 to 19, foreigners net purchased 5.3 trillion KRW and 300 billion KRW in the KOSPI and KOSDAQ, respectively," adding, "Considering that inflows into equity funds have been observed after past presidential elections and that preference for emerging markets is increasing due to the weak dollar trend, foreign capital inflows into the domestic stock market are expected to continue for the time being."

However, he noted that the technical signs of overheating in the KOSPI are a concern.

As of the 19th, the KOSPI RSI (the ratio of up days to down days over 14 trading days) recorded 72.9%, exceeding 70% only 20 times since 2015. He explained that before signs of overheating, the KOSPI rose 4.0% over 14 trading days but then experienced a slowdown in the pace of gains.

Researcher Noh forecasted, "Despite favorable supply-demand conditions and expectations for fundamental improvements, the pace of KOSPI's rise may somewhat slow down."

Hana Financial Investment also expects that the domestic stock market next week will likely see limited upward momentum due to the spread of COVID-19, predicting the KOSPI to move between 2500 and 2580.

However, with positive Phase 3 clinical trial results for COVID-19 vaccines from global pharmaceutical companies such as Pfizer and Moderna, the potential for a wider correction compared to the 19% and 0.7% declines in the KOSPI during February-March and August, respectively, is considered low.

Nonetheless, depending on the possibility of social distancing level upgrades, momentum for domestic consumption sectors such as retail ahead of the year-end shopping season may weaken.

Researcher Jae-seon Lee of Hana Financial Investment said, "If the level is raised to stage 2 or higher, a temporary domestic demand recession may occur."

Notable upcoming events include the November Monetary Policy Committee meeting scheduled for the 26th in Korea and Black Friday, the largest shopping season in the U.S., starting on Friday. Researcher Lee said, "The Monetary Policy Committee is expected to keep the base interest rate unchanged and is likely to emphasize the continuation of an accommodative monetary policy rather than providing clear signals that could influence the market."

Regarding Black Friday, he stated, "Due to COVID-19, U.S. year-end consumer sales are expected to record the lowest level since the financial crisis. Surveys show that American consumers feel a significant burden regarding year-end gift spending. Especially, compared to gifts like IT devices and clothing, the 'stay-at-home economy' activated by COVID-19 has increased spending intentions on hygiene management and home decoration rather than gifts, which suggests that the impact of the U.S. year-end shopping season on domestic clothing and IT appliance companies is likely to be weaker than in the past."