[Good Morning Stock Market] "KOSPI, Concerns Over Slowing Momentum vs Growing Fundamental Expectations"

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] In November, the KOSPI surged significantly, led by foreign investors. While one might consider a slowdown in upward momentum due to technical burdens or supply-demand gaps, analysis suggests that a positive market trend can still be expected.

Last month, the KOSPI recorded the third-highest monthly return since 2000, driven by net purchases from foreigners. Although months following the top 10% monthly returns in the past have shown some deceleration in gains, it was more common for the upward trend to continue despite the slowdown.

In addition to favorable exchange rate conditions, a sharp drop in the uncertainty index is evaluated as the trigger for the explosive foreign buying in November. Indicators reflecting volatility and safe-haven asset preference have already returned to pre-COVID-19 levels. While low risk indicators can be viewed positively, it is also necessary to consider that the factors driving foreign demand momentum may have been exhausted.

◆Byunghyun Cho, Researcher at Yuanta Securities=In November, the KOSPI achieved a record rise based on strong net purchases by foreigners. The 14.3% increase, measured by monthly closing prices, ranks as the third highest monthly gain since 2000. The only other months with higher gains were January and November 2001, when the market attempted a rebound from the bottom following the IT bubble collapse. Given the strong upward momentum, concerns about a reactionary pullback seem justified.

From an empirical perspective, the average return for months in the top 10% since 2000 is 11.7% (ranging from 8.0% to 22.5%). The average return in the month following such a surge tends to drop to 1.2%. This suggests that the perception of technical burdens after a sharp rise is not unfounded. However, it is also difficult to assume an inevitable correction, as 58% of the months following a surge still recorded positive returns, which is more frequent than cases of decline immediately after a surge. Thus, from an average viewpoint, a slowdown in upward momentum can be anticipated.

The driving force behind the index's sharp rise in November was foreign demand. Despite a large-scale sell-off likely due to a passive event at month-end, net purchases approached 5 trillion KRW during November. Favorable carry conditions for foreigners appear to have been established since at least August or September, but the sudden dramatic change in foreign investors' behavior seems linked to volatility and safe-haven asset preferences.

Recently, foreign net buying in the domestic stock market has moved inversely to the Volatility Index (VIX). The VIX surged in October due to the U.S. presidential election and the resurgence of COVID-19 but quickly declined as the election concluded and positive vaccine clinical results were announced. Ultimately, the combination of uncertainty easing and favorable carry conditions acted as the main drivers of strong net buying. Currently, risk-related indicators are near pre-COVID-19 levels. While low volatility levels are generally interpreted positively, the strong foreign response to the recent decline in volatility could also be seen as a sign of momentum exhaustion. Additionally, considering the seasonal tendency for foreign trading to become lukewarm toward year-end, the possibility of weakening buying strength appears high.

This is a point at which the possibility of a slowdown in upward momentum due to technical burdens and weakening foreign demand can be explored. However, even considering this possibility, maintaining an active stance remains necessary. Briefly, two reasons support this. First, macro momentum indicators are resuming improvement. One tool for assessing the short-term direction of the stock market is the spread between the Citi Economic Surprise Index and the Macro Risk Index. This measures the relative strength of macro momentum and safe-haven asset preference. As mentioned, risk indicators have returned to pre-COVID-19 levels. The Economic Surprise Index turned downward after August, coinciding with a slowdown in market momentum. This reflected a gap between overly high recovery expectations and the slow actual recovery. However, this indicator has recently passed its low point, suggesting that despite the COVID-19 resurgence, the gap between expectations and actual economic conditions has narrowed significantly.

Secondly, the pace of earnings forecast improvements in the Korean stock market is accelerating. The Q3 earnings surprises from leading stocks, including Samsung Electronics, have strengthened expectations for future performance. Considering the rising expectations from both macro and earnings fundamentals, it is not yet time to abandon hopes for a positive market trend.

◆Sangyoung Seo, Researcher at Kiwoom Securities=Yesterday, the Korean stock market reached an all-time high, driven by a surge in semiconductor-related sectors following Micron's (3.03%) upward revision of quarterly earnings and growing optimism about the semiconductor industry. Notably, foreign investors were the largest contributors, with net purchases exceeding 500 billion KRW. Meanwhile, the U.S. stock market showed a differentiated trend, with value stocks such as banks, energy, and leisure sectors gaining strength due to vaccine optimism, while tech stocks underperformed. This reflects a differentiation occurring during a pause after a sharp rise.

Meanwhile, Federal Reserve Chair Jerome Powell expressed confidence in the economic recovery, and House Speaker Nancy Pelosi asserted that negotiations on a $900 billion stimulus package would proceed and reach an agreement, both expected to positively influence investor sentiment. However, concerns remain due to signs of contraction in the U.S. real economy, including employment, and the Fed's Beige Book noting a slowdown in recovery. Additionally, Joe Biden's statement that he does not intend to lift tariffs imposed on China by Donald Trump raises further worries. Considering these factors, the Korean stock market is expected to start higher but will likely continue to experience a stock-specific market led by foreign investors, as seen the previous day.