[Good Morning Stock Market] Korean Stocks Expected to Weaken Due to Sharp Drop in US Market... "Volatility Likely to Be Limited"

[Image source=Yonhap News]

[Asia Economy Reporter Park Ji-hwan] Last week, the U.S. stock market experienced a sharp decline, especially in technology stocks, as investment sentiment rapidly deteriorated due to concerns over the spread of the Omicron variant. Market experts predicted that the domestic stock market would also show a weak trend influenced by the decline in the U.S. market. However, volatility is expected to be relatively limited and less pronounced compared to the U.S. market. This is because, considering the current domestic and international adverse conditions, the domestic stock market is judged to have a significantly lower valuation burden both relatively and absolutely.

◆ Seo Sang-young, Researcher at Mirae Asset Securities= The domestic stock market is expected to start lower and then show limited fluctuations. Last Friday, the Korean stock market initially fell due to hawkish remarks from Federal Reserve officials but managed to turn upward as foreign investors entered buying positions. Additionally, comments from Chinese diplomats hinting at the lifting of the Hanhanryeong (Korean Wave ban) led to strength in digital, media, and entertainment sectors, resulting in gains mainly in the KOSDAQ market.

Last week, the U.S. stock market was burdened by the Nasdaq falling nearly 3% at one point, as investment sentiment weakened amid concerns over Omicron’s spread, leading to sell-offs mainly in some technology stocks that had expanded gains since the pandemic. Despite a sharp drop in the non-farm payroll index centered on travel and hospitality sectors in the U.S. employment report, Federal Reserve officials continued to make hawkish remarks, which also weighed on the market.

Overall, the U.S. financial market saw increased volatility amid weakened risk asset preference, raising the possibility of dampened investment sentiment in the Korean stock market. Considering this, the Korean stock market is expected to open down about 1%. However, the likelihood of volatility expanding as much as in the U.S. market is low. This is because, unlike the bond and stock markets, changes in the foreign exchange and commodity futures markets were limited, and the U.S. market narrowed losses as rebound buying emerged near the close.

◆ Seo Jung-hoon, Researcher at Samsung Securities= The uncertainty phase caused by the emergence of the variant virus is expected to continue until mid-December. However, even considering domestic and international adverse conditions, the value attractiveness of the domestic stock market remains valid. The emergence of the Omicron variant provides the possibility of creating negative synergies. Although the financial market appears to have found some calm after the first wave of Omicron, if the absolute number of infections continues to rise, there is a risk of renewed volatility.

Coincidentally, the last Federal Open Market Committee (FOMC) meeting of the year is scheduled for next week. It is clear that the market may become more sensitive to bad news than good news. However, there is sufficient value in using this uncertainty as an opportunity. Even considering all risk factors, the domestic stock market’s valuation burden remains significantly low both relatively and absolutely. The KOSPI around the 2900 level corresponds to a negative return compared to the beginning of the year, which effectively excludes the earnings base built by domestic companies this year. If a pronounced recession were expected next year, this might be more convincing, but consensus remains high regarding domestic economic growth and corporate earnings.

Macro conditions are not entirely negative either. Despite the Fed’s accelerating tightening, the dollar index, a key factor in emerging market financial conditions, is showing limited upside. The U.S. 10-year Treasury yield, a global benchmark interest rate, is following a similar trajectory, supporting liquidity conditions.