[Stock Market Urgent Diagnosis] KOSPI Swayed by Triple Hardships, Correction Inevitable "Not a Downtrend"

Geopolitical Risks in the Middle East, Interest Rates, and Exchange Rates Weigh Down
Foreign Buying Slows, Creating Supply-Demand Gap
Fundamental Improvement Trend Valid...Recommend Responding at 2500 Level

The domestic stock market is staggering under multiple adverse factors. After falling below the 2700 level last week, it dropped below the 2600 level during trading on the 17th. Amid ongoing geopolitical risks in the Middle East, expectations for interest rate cuts are gradually fading due to strong U.S. economic indicators. These factors support the dollar's strength, causing the exchange rate to soar. As a result, foreign investors, who had been supporting the stock market, have started massive selling in the futures market, pulling the index down. Market experts diagnose that a short-term correction is inevitable, but it is not a trend reversal to a sustained decline.

As of 10:20 a.m. on the 17th, the KOSPI recorded 2598.59, down 11.04 points (0.42%) from the previous day. It started the day with an upward trend due to a rebound buying following the sharp drop the day before, but then turned downward and fell below the 2600 level during trading.

The won-dollar exchange rate rose to 1400 won during trading the previous day, causing both the KOSPI and KOSDAQ to fall more than 2%. Oh Tae-dong, head of the NH Investment & Securities Research Center, analyzed, "The rise in the exchange rate to 1400 won during trading led to foreign investors withdrawing funds from the Korean stock market, which was a factor in the stock price decline. The geopolitical risks in the Middle East have not been fully resolved, and the U.S. economy showed strength with March retail sales exceeding market expectations, which contributed to the dollar's strength and the exchange rate increase. At the same time, the U.S. 10-year Treasury yield rose to 4.6%, which also weighed on stock prices."

Park Hee-chan, head of the Mirae Asset Securities Research Center, also noted, "The exchange rate caused the stock market's decline to deepen," adding, "The background behind the exchange rate movement is that strong U.S. real economy indicators have led to a continuous retreat in expectations for interest rate cuts."

As the exchange rate continues to rise, foreign buying, which had supported the stock market, has slowed. Foreign investors have net purchased 2.8321 trillion won in the securities market this month up to the previous day, but have sold 4.6732 trillion won in the futures market. Lee Jin-woo, head of the Meritz Securities Investment Strategy Team, analyzed, "One of the reasons the market has held up well from a supply-demand perspective was foreign investors. As foreign buying has slowed, the supply-demand gap on various issues seems to have led to the decline." However, there is an opinion that foreign investors have not turned to outright selling despite the temporary pause due to domestic and external variables. Jung Myung-ji, head of the Samsung Securities Investment Information Team, said, "Foreigners have sold a lot of futures but not much spot stocks; selling futures is largely for hedging purposes. Since they have not sold a significant amount of spot stocks, it is still difficult to say they are betting on a downward trend." He added, "We will need to confirm this later, but if they sell Korea broadly across sectors in spot stocks, that would mean a trend reversal to a decline. Currently, they have sold semiconductors, which they bought a lot of, and bought stocks like Hyundai Motor."

While a correction seems inevitable for the time being, the prevailing view is that it is not a trend reversal to a sustained decline. Hwang Seung-taek, head of the Hana Securities Research Center, predicted, "Short-term corrections are unavoidable due to strong U.S. retail sales, expanded geopolitical risks in the Middle East, and a sharp rise in the exchange rate. However, if risk sentiment eases, stock prices will recover starting with large export stocks based on strong corporate earnings and China's economic recovery."

The U.S. March Personal Consumption Expenditures (PCE) price index, to be released at the end of this month, is expected to be a turning point for easing anxiety. Lee Kyung-min, head of the FICC Research Department at Daishin Securities, said, "As the March PCE price index is confirmed, anxiety is expected to subside, and a process of bond yield and dollar pullback will appear. Subsequently, foreign futures selling will ease and switch to buying, leading to a short-term rebound phase, with a possible rebound to the mid-to-high 2700 level in early May."

Continued stock market rebounds are expected to be possible only when concerns about interest rates and exchange rates ease. Jung said, "The current vicious cycle must be broken for the market to rebound. The first link in the vicious cycle is interest rates, the second is the dollar, and the third is the particularly weak won." He explained, "For example, even if U.S. interest rates or the dollar are strong, if domestic financial authorities intervene to sharply lower the won-dollar exchange rate, or if Jerome Powell, chairman of the U.S. Federal Reserve, reassures the market causing U.S. long-term interest rates to fall, then long-term interest rates will fall, the dollar will weaken, and the exchange rate will stabilize."

Since exports are on a recovery trend and corporate earnings are improving, indicating a fundamental improvement, there is advice to consider buying around the 2500 level. Oh said, "There are additional risks of stock price declines due to Middle East risks and delayed Fed rate cuts, so we should keep in mind the possibility of a drop to around 2510, which corresponds to a trailing price-to-book ratio (PBR) of 0.91, the support level during the sharp drop in January." However, he recommended buying around the 2500 level, noting, "The decline factors do not change the fundamental trend of the domestic stock market." He added, "After Samsung Electronics posted a surprise earnings beat in the first quarter, the 12-month forward operating profit forecast for the KOSPI semiconductor sector has been steadily revised upward, expanding the visibility of earnings improvement."