From Vaccines to Stimulus Measures... Stock Market Shifts Its Balance

Vaccination Has Started... But Time Lag Needed Until Gyeonggi Normalization
Expectations Rise for Stimulus Measures with Immediate Effect

On the afternoon of the 11th, when the KOSPI hit an all-time high for the first time in two days, the index was displayed in the dealing room of Hana Bank in Jung-gu, Seoul. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Following the COVID-19 vaccine, stimulus measures are expected to drive the stock market's preference for risk assets and support the market. This is because economic recovery is unlikely to become immediately visible through vaccination alone, and unexpected side effects have appeared, as seen in the case of the United Kingdom. Instead, market attention is expected to focus on stimulus measures that have steadily raised expectations but have yet to materialize.

The Stock Market Still Prefers Risk Assets

On the 12th, IBK Investment & Securities forecast that the domestic stock market's preference for risk assets would be maintained due to expectations for stimulus measures. Despite concerns about overheating following the recent sharp rise in the stock market, the market still maintains a preference for risk assets. The KOSPI recorded an all-time high of 2781.04 during intraday trading the previous day. It has maintained the 2700 level after repeatedly hitting new highs several times this week.

The gold/silver ratio and Swiss franc/Australian dollar ratio, which indicate the strength of safe-haven asset preference, have fallen to pre-COVID-19 levels. Over the long term, these ratios have shown a clear inverse relationship with the KOSPI. From the market sentiment perspective, the current direction of the KOSPI is not expected to change significantly.

Risk asset preference is also evident from investor surveys in the stock market. According to the weekly survey results by the American Association of Individual Investors (AAII), the optimistic view of the stock market over the next six months is at its highest level since the 2017 bull market.

Expectations for economic recovery are also supporting the stock market rise. Notably, copper prices, which have a high correlation with the KOSPI, continue to rise sharply. Since copper is a key raw material used across manufacturing industries, price fluctuations due to supply and demand changes can be seen as leading indicators of economic trends. Researcher Soeun Ahn of IBK Investment & Securities explained, "The continued abundant liquidity environment and the absence of major negative factors aside from valuation pressures are themselves supporting the stock market rise."

The Effect of COVID-19 Vaccines Is Gradually 'Slowing'

IBK Investment & Securities identified the COVID-19 vaccine as a key variable in risk asset preference. This is because vaccination, the only means to return to pre-pandemic conditions, has begun. Pfizer vaccinations have already started in the UK, and in the US, President Donald Trump announced on the 11th (local time) that vaccinations would begin within 24 hours. The European Union (EU) and Japan have also completed large-scale pre-orders for Pfizer's COVID-19 vaccine. Considering vaccines from Moderna and AstraZeneca, competitive emergency use approvals and vaccinations are expected to continue in major countries.

However, the power of vaccine development, emergency use approval, and vaccination itself to boost the stock market is expected to gradually weaken. Expectations for vaccination have already been priced in, and the economic normalization that the market wants to confirm next due to vaccines is unlikely to appear visibly in the short term. In the UK, side effects related to vaccination have already been mentioned, causing the stock market's upward momentum to slow. In South Korea, foreign investors, who had been sensitive to vaccine issues, have somewhat reduced their buying activity.

Focus Should Be on Stimulus Measures Directly Linked to Economic Normalization

Therefore, market attention is expected to focus on stimulus measures directly linked to economic normalization. In particular, the key issue is whether additional stimulus measures will pass in the United States. Since the first discussion of the fifth COVID-19 response stimulus package in May, negotiations between the two parties have been delayed for seven months due to conflicts over the policy scale and details. Although political uncertainty caused by the presidential election has somewhat eased and bipartisan negotiations resumed this month, differences remain unresolved.

While the agreement may be further delayed, expectations for a deal remain. This is because, amid growing risks of economic slowdown due to the spread of COVID-19 and strengthened lockdown measures, President-elect Joe Biden has emphasized the need for stimulus measures to prevent a recession before taking office. The Democratic Party, which insisted on a large-scale stimulus package exceeding $1 trillion over the past seven months, recently proposed a stimulus package of about $900 billion in this context.

The fact that some existing COVID-19 stimulus measures are set to expire this month also raises expectations for additional stimulus. First, the temporary expansion of unemployment benefits to include freelancers and independent contractors, as well as the extension of unemployment benefit support periods, will end on the 26th. According to the Congressional Budget Office (CBO) analysis, these policies were the most effective in boosting gross domestic product (GDP).

Researcher Ahn stated, "Since consumption accounts for a large portion of the US economy, employment support policies are important, and efforts to pass additional stimulus measures will continue before policies with significant domestic demand stimulus effects conclude." She added, "The short-term budget passed recently by the House of Representatives is effective until the 18th, so the US Congress is likely to agree on and pass additional COVID-19 response stimulus measures along with the 2021 fiscal year budget before the 18th."