[Good Morning Stock Market] COVID-19 Resurgence... Will KOSPI's Dash Toward 2600 Continue?

[Asia Economy Reporter Oh Ju-yeon] As concerns over the third wave of the novel coronavirus infection (COVID-19) grow, attention is focused on whether the KOSPI's upward trend, which has been running nonstop this month, will continue. The KOSPI's November rise rate showed a strong flow, reaching 12.6%, close to an all-time high. However, the consensus in the securities industry is that a correction due to profit-taking may occur at the previous peak level. Nonetheless, it is expected that this correction will be more of a time correction rather than a large-scale decline, and even if a correction occurs, it is necessary to focus on next year's economy and formulate investment strategies accordingly, drawing attention.

[Image source=Yonhap News]

◆ Lee Kyung-min, Researcher at Daishin Securities = The upward trend, which began with the easing of uncertainty over the U.S. presidential election and expectations, is being driven by expectations for early commercialization of vaccines and treatments, as well as large-scale foreign buying due to the strengthening of the Korean won. Breaking through the 2600-point level on the KOSPI and reaching historic highs is not impossible. However, it should not be overlooked that the corresponding fatigue from the rise is accumulating. The market has already reflected a significant portion of the positive factors.

Until mid-November, global financial markets showed a strong positive response to surprising news about the efficacy of COVID-19 vaccines. However, since last week, despite news about vaccine efficacy and development, financial markets have shifted to a cautious mode. This means that vaccine expectations have been largely priced into the stock market in the short term and suggests that the influence of the COVID-19 vaccine's positive news is weakening.

Poor performance is expected in major economic indicators announced from the last week of November. This is because, amid the continued surge in COVID-19 cases, lockdown measures are being strengthened weekly not only in Europe but also in the United States. In Europe, mobility indices have dropped to -57% (from -13% at the end of October) due to strengthened lockdown measures. Although the surge in COVID-19 cases in Europe has subsided, the downside is that the intensity of economic slowdown in Europe may increase. The United States is also strengthening lockdown measures in major cities including New York. If European lockdown policies are extended from late November to early December, economic anxiety is likely to expand.

On the other hand, concerns about policy retreat are also increasing. There are signs that negotiations for the U.S. fifth economic stimulus package may resume, but the U.S. Treasury's termination of the emergency loan program for COVID-19 response could trigger anxiety that the safety net may weaken amid the resurgence of COVID-19.

Overall market sentiment supports the rise, but anxiety factors are also growing. In terms of sector rotation, sectors that have not yet risen include utilities, telecommunications, and non-ferrous metals and wood. Ironically, sectors with defensive characteristics are waiting for their turn in the rotation.

◆ Ha In-hwan, Researcher at KB Securities = It is time to start managing risks gradually. COVID-19 is resurging, and from midnight on the 24th, social distancing will be raised to level 2 in the metropolitan area. COVID-19 resurgence is occurring not only domestically but also in the United States, Japan, and Europe. Although COVID-19 is resurging, Pfizer's vaccine approval request to the U.S. FDA is scheduled to be decided on December 8. If Pfizer's COVID vaccine is approved, financial markets will respond positively, but until then, the risk of COVID-19 resurgence is likely to be reflected.

Expectations for vaccine approval may lead to another noise. On the 19th, Treasury Secretary Mnuchin announced that five of the Federal Reserve's emergency lending programs would not be extended. This is the exact opposite of what Chairman Powell said just a day earlier, stating that the emergency lending programs scheduled to end on December 31 would be extended. It is highly likely that the results of discussions on this matter will be announced at the December FOMC, so it is necessary to prepare for short-term noise.

The current COVID-19 resurgence is unlikely to lead to a 'major shock.' It is expected that in December, a 'minor shock' level time correction is more likely. One point to note is that the current recovery speed is very similar to that of 2009, and based on this, caution will be needed again around March next year. This is because after the real economy has somewhat recovered, when additional recovery expectations are low, stock price corrections may occur.

◆ Lee Hyo-seok, Researcher at SK Securities = Although the gap between expectations for vaccines and the reality of COVID-19's impact is widening, this situation is fostering expectations for a Goldilocks scenario and positively affecting the stock market.

It is true that as expectations for the economy grow, concerns about stimulus measures may also increase, and that a correction due to profit-taking at previous peak levels is possible. However, I recommend maintaining stock exposure while keeping a positive outlook for next year's market.

Meanwhile, the most debated topics in the market in the second half of this year were 'why stock prices can rise despite a poor economy' and 'why inflation is not occurring despite liquidity being injected.'

The biggest reason stock prices could rise despite a poor economy was that the stock market does not represent the economy. The phrase 'the economy is not good' refers to all economic agents, but the stock market reflects only the performance of large-cap stocks that are representative. Unfortunately, the pain of economic agents hit by COVID-19 was not reflected in the stock market. Also, despite an unprecedented amount of liquidity being injected, inflation has still not been confirmed because deflationary pressures remain strong. Although inflation has not yet been confirmed, the extent to which inflation can be observed will remain an important issue next year.