KOSPI Hit Harder Than Others... Experts Say "The Downturn Is Not Over"

Among the Top 10 Countries, KOSPI Has the Second Lowest Decline Rate
Dollar Strength Directly Linked to Domestic Stock Market PER Drop
Experts Advise "Securing Cash" as Economy Approaches Recession Phase

[Asia Economy Reporter Minji Lee] Last month, as major global indices took a heavy hit and wavered significantly, the KOSPI's decline was notably more pronounced. The downturn intensified due to increased volatility in the foreign exchange market amid recession concerns and a strong dollar. Experts judged that it is premature to approach stocks solely based on excessive declines, given the lingering effects of monetary tightening.

On the 4th, Asia Economy analyzed the stock indices of 10 major countries over the past month and found that the domestic KOSPI index fell by more than 10%, ranking second in decline after Hong Kong's Hang Seng Index, which dropped 12%. The KOSPI started trading at 2415.61 on the 1st of last month but closed at 2155.49, continuously hitting yearly lows toward the end.

In the United States, where the Federal Reserve's tightening impact was directly reflected, the Dow Jones Index fell by 9.2%, while the UK’s FTSE 100 (-3%) and Germany’s DAX (-4%) showed relatively better returns. Other Asian markets such as China’s Shanghai Composite (-5%), Japan’s Nikkei 225 (-6.2%), and Taiwan’s TAIEX (-9.3%) also declined less than the KOSPI. Brazil’s Bovespa Index, which had already raised interest rates early to counter high inflation, only fell by 0.3%.

In a situation where high-intensity tightening and recession fears suppressed global stock markets, a foreign exchange market shock triggered overselling in the domestic stock market. The won-dollar exchange rate surpassed 1440 won, continuing its high-level surge and prompting net selling by foreign investors. In fact, foreign investors net sold about 2.52 trillion won worth of stocks centered on the semiconductor sector over the past month. Laborngil, a researcher at Shinhan Investment Corp., said, “The strong dollar directly leads to a decline in the price-to-earnings ratio (PER) of the Korean stock market,” adding, “Although all countries are experiencing exchange rate fluctuations, the larger adjustment range here means that until the strong dollar phase eases, a rebound in the domestic stock market is difficult.”

Stock market experts agree that while domestic stocks have become much cheaper, it is not the time to significantly increase holdings. This is based on the analysis that concerns over a strong dollar due to high-intensity tightening will continue to suppress the market in October. They emphasized that it is difficult to view the stock market outlook optimistically, especially as corporate profit margin forecasts continue to decline. The earnings forecasts for KOSPI companies this year and next have already been sharply revised downward, with this year’s net profit forecast down 8.8% from the beginning of the year and next year’s net profit dropping by 17%. Kyungmin Lee, a researcher at Daishin Securities, predicted, “As the level of corporate profits continues to decline, the KOSPI will face a second downturn following the initial drop caused by tightening pressures.”

Considering this, the most necessary stock market response at this point is securing cash. Depending on the results of the U.S. employment data and Consumer Price Index (CPI) announcements on the 7th and 13th of this month, if expectations for the Fed to slow the pace of rate hikes increase, the stock market could see a short-term rebound, and it is advised to have cash ready for that moment. The Investment Strategy Department at Shinhan Financial Investment stated, “It is too early to discuss the KOSPI’s bottom amid intense tightening fears and foreign exchange market volatility, and cash holdings should be actively increased,” adding, “With the economy on the brink of recession, a challenging market environment is expected to continue for the time being.”