[Super Austerity Era] Stock Market Frozen Amid Numerous Variables... Can Fundamentals Overcome Interest Rates?

[Asia Economy Reporter Lee Seon-ae] As the 'era of tightening' arrives, volatility in the domestic stock market is expected to inevitably increase. The U.S. Federal Reserve's (Fed) monetary tightening policy, geopolitical crises surrounding Ukraine since the beginning of the year, and a sharp rise in oil prices have consecutively emerged as negative factors, causing the domestic stock market to plunge in January. Going forward, uncertainties related to tightening policies are expected to hinder the domestic stock market and control its upward recovery. Looking at data from the past 30 years, when a 'growth' signal appears, the stock market is expected to overcome concerns about interest rate hikes and follow an upward trajectory. The variable is the timing of when the growth signal appears.

On the 11th, the financial investment industry predicted that the domestic stock market will be influenced more by the economy and corporate profits than by interest rates as a variable. They unanimously agreed that rather than worrying about already confirmed tightening, attention should be paid to how stable the upcoming economic indicators and corporate profits will be.

Yang Hae-jung, a researcher at DS Investment & Securities, said, "The essence of the stock market is influenced more by the economy and corporate profits than by tightening, so if economic indicators stabilize again and corporate profit growth is confirmed, the domestic stock market will be able to fully overcome the trauma of tightening." She added, "The first quarter earnings season is expected to be a turning point determining returns in this year's stock market, and how much fundamentals can overcome the negative policy direction (interest rate hikes) is important."

Kim Jung-won, a researcher at Hyundai Motor Securities, explained, "Rather than fearing interest rate hikes, we should focus on whether the economy has recovered enough to withstand them and on the movements of the U.S. dollar."

However, unlike past data, this interest rate hike period is concerning because various variables exist. These include the COVID-19 pandemic, slowing growth rates of global and domestic corporate profits, exchange rates, and oil prices. This is why there are concerns that the strong positive correlation between the base interest rate and the index may weaken somewhat.

If the global economy slows down, corporate earnings will naturally deteriorate. Goldman Sachs recently forecasted that due to concerns over the Omicron variant, growth rates for the fourth quarter of this year (October to December) and next year will slow down compared to previous projections. They lowered the U.S. growth forecast for next year from 4.2% to 3.8%, citing risks and uncertainties caused by the spread of the Omicron variant. The fourth quarter growth forecast was also lowered from 3.3% to 2.9%.

There is also a flood of forecasts that domestic economic growth will slow this year due to internal and external adverse factors. It is expected that the recovery in consumption will be limited due to the spread of Omicron, and China's economic slowdown will act as a downside factor for the global economy, inevitably affecting the domestic economy. Accordingly, the International Monetary Fund (IMF) predicted that South Korea's economic growth rate this year will be 3.0%, down 0.3 percentage points from the forecast in October last year, and expects 2.9% growth next year.

Researcher Yang explained, "In the past, oil prices were low, so inflation concerns were not high, and cost factors were not significant. Corporate profit margins rebounded first with low costs, followed by sales growth, leading to a significant rise in corporate profits." She added, "However, this time, concerns about corporate profit declines arise due to export sluggishness caused by economic slowdown and rising cost factors (oil and raw material prices) due to inflation, and this is directly reflected in the stock index." She further analyzed, "If the burden of cost factors eases, the COVID-19 phase ends and normalization begins, and growth signals such as escaping the impact of rising oil and raw material prices appear, sensitivity of the stock market to interest rate hikes will decrease."