"Weakness in Stock and Bond Markets to Continue Next Year... Difficult to Find Momentum for Rebound"

'2022 Financial Trends and 2023 Outlook Seminar'

Interest Rate Hikes, Strong Dollar, Corporate Earnings Deterioration, Recession Concerns
Capital Outflows Intensify and Investment Sentiment Weakens

Bond Market Volatility to Increase
Risks in Various Areas Including Real Estate Project Financing (PF) Defaults

[Asia Economy Reporter Sim Nayoung] It is forecasted that the financial markets, including stocks, bonds, and real estate, will continue to experience a bearish trend next year. A rebound due to policy measures or base effects is expected to be possible only partially after the second quarter.

On the 8th, at the Bankers Association in Myeongdong, Seoul, during the '2022 Financial Trends and 2023 Outlook Seminar' hosted by the Korea Institute of Finance, Kim Young-do, head of the Capital Market Research Office at the Korea Institute of Finance, who presented on the topic of 'Changes and Outlook of the Financial Market Environment,' stated, "In 2023, it will be difficult to find rebound momentum until uncertainties related to interest rate hikes ease and concerns about economic recession are confirmed," adding, "Some rebound due to policy or base effects can be expected only after the second quarter."

Regarding the stock market, he noted that capital outflows will intensify and investor sentiment will weaken due to global inflation, interest rate hikes, a strong dollar, deteriorating corporate earnings, and recession concerns. Although the slowdown in base interest rate hikes in the second half of next year was cited as the only upward factor, he predicted that the potential for gains will be limited if recession concerns persist.

For the bond market, he anticipated increased volatility next year due to uncertainty about how long interest rates will remain at their peak. He identified risks threatening stability, including real estate project financing (PF) default risks, liquidity risks of financial institutions related to real estate PF and A-rated construction companies, and the risk of credit rating downgrades for general corporations.

Kim explained, "Risks of real estate PF defaults have emerged due to rising interest rates, falling real estate prices, and increasing construction costs," adding, "Since last year, the outstanding balance of PF asset-backed commercial paper (ABCP) has increased from 15 trillion won to 22 trillion won, maturities have shortened, and the proportion of A-2 rated paper has risen by 26.6%, making signs of default visible." He continued, "Due to a sharp decline in PF ABCP investment demand from specific money trusts, securities firms face the risk of contingent liabilities turning into large-scale expanded liabilities."

He assessed that the domestic financial exposure related to real estate has turned red across the board, affecting both households and commercial real estate.

Kim stated, "Considering the high proportion of real estate in household assets and the high share of variable-rate loans domestically, if high interest rates and housing market downturns persist long-term, multiple debtors, high-risk borrowers, and small business owners could face rapid loss of repayment ability and defaults," adding, "There is also a possibility of a fire sale phenomenon due to expectations of further housing price declines, and financial institutions may experience significant deterioration in asset soundness due to loan defaults and collateral value declines caused by the real estate slump."

Regarding commercial real estate, he predicted, "Compared to housing, commercial real estate has a higher leverage ratio, greater price volatility due to economic changes, and difficulty in recovering funds when prices fall. In the event of an industry downturn, this could lead to chain bankruptcies from business site defaults, increased redemption demands for indirect investment products, and refinancing failure risks upon maturity."