[Practical Finance] Domestic Stock Market in the Second Half: Bear Market or 3,000-Point Recovery?

[Asia Economy Reporter Myunghwan Lee] The tension between Russia and Ukraine that erupted at the beginning of the new year ultimately escalated into war, shaking global stock markets. The domestic stock market also continued to weaken. The tightening policy represented by the U.S. Federal Reserve's (Fed) big step (a 0.5 percentage point increase in the benchmark interest rate at once) was also a burden on our stock market. Supply shortages due to China's COVID lockdowns and inflation issues remain challenges. We reviewed securities firms' forecasts on the direction of the index in the second half of the year amid various adverse factors.

Second Half of the Year: Slight Rebound Followed by Continued 'Bear Market'

"There will be no dramatic rebound in the second half of this year."

Research centers of securities firms recently released reports citing the persistence of negative market factors such as inflation. They pointed out that while the Fed's tightening stance continues due to rising prices, other adverse factors like supply chain issues are also scattered. Ji-young Han, a researcher at Kiwoom Securities, predicted that the KOSPI will move between 2480 and 2930 in the second half. She said, "Considering that a policy shift by the Fed due to inflation is difficult despite the perception of a bottom, the stock market in the second half will show a box range with a gentle rebound followed by a downward trend rather than a V-shaped recovery."

Kyung-soo Lee, a researcher at Meritz Securities, identified the current market as being in the mid-to-late stage of a 'reverse financial market.' Although earnings have risen, interest rates have also increased, causing stock prices to decline. Lee analyzed, "Despite the global stock market decline at the beginning of the year, the market maintains solid fundamentals," adding, "Stock prices fell due to central banks' tightening policies despite strong earnings." He projected the KOSPI range for the second half to be 2450 to 2850. Shinhan Investment Corp. suggested a KOSPI band of 2400 to 2850 for the second half. Researcher Dong-gil Noh of Shinhan Investment said, "With limited room for further valuation decline, the index will show a trajectory sensitive to earnings," emphasizing, "The key is whether the reliability of 2023 earnings becomes visible as supply chain disruptions ease."

Entering Recovery Phase... Possibility of Returning to 'Samcheonpi'

On the other hand, there is analysis that the KOSPI could return to the 3000 level. This is because the Fed's tightening intensity is expected to weaken while the stock market shows a trend of earnings-driven growth. If the market escapes from adverse factors such as the Ukraine war and the spread of COVID in China, momentum for returning to the 3000 level is expected. Seung-young Park, a researcher at Hanwha Investment & Securities, predicted that the Fed's rate hikes will shift from big steps to baby steps, leading the KOSPI to recover to 3000. Park said, "The U.S. inflation rate is expected to fall to the 4% range by the end of the year," adding, "Although the Fed's tightening stance will continue, if the intensity weakens, the valuation burden felt by the stock market will lessen."

Dae-jun Kim, a researcher at Korea Investment & Securities, anticipated a gradual recovery of the KOSPI in the second half. Kim said, "The index's directionality will be clearer in the second half than in the first half," and forecasted, "If supply shortages and inflation triggered overseas, Fed-led monetary tightening, and capital outflows due to a strong dollar ease or improve, stock prices could reach higher levels." He suggested a KOSPI band of 2460 to 3000.

Jung-hwan Na, a researcher at Cape Securities, also predicted, "In the best-case scenario where the Russia-Ukraine war does not prolong and ends within the second quarter, and China's zero-COVID policy effectively controls the spread of COVID-19, gradually easing China's supply chain disruption issues, the KOSPI could recover to 3000 in the second half." Yong-gu Kim, a researcher at Samsung Securities, said, "Before the July Federal Open Market Committee (FOMC) meeting, the index will test downside support around the lower forecast of 2500, then rebound to 2800 by the end of the third quarter," adding, "A stepwise normalization process aiming to settle at 3000 by year-end is expected to continue."