[Market ING] With Expectations Gone, KOSPI Faces Inevitable Correction for Now

As the expectations that had supported the upward trend of the KOSPI have faded, the KOSPI has fallen below the 3,200 mark. Market forecasts suggest that a period of adjustment will continue for the time being.

Yonhap News

Last week, the KOSPI fell by 2.40%, and the KOSDAQ dropped by 4.23%. Notably, on August 1, the last trading day of the week, the KOSPI plummeted by 3.88%. Na Jeonghwan, a researcher at NH Investment & Securities, explained, "On August 1, the KOSPI fell by 3.88% and the KOSDAQ by 4.03%, marking the largest decline since the launch of the new administration. In terms of supply and demand, the foreign investors and institutions that had supported the KOSPI's rise in July sold 652.4 billion won and 1.072 trillion won, respectively." Lee Kyungmin, a researcher at Daishin Securities, analyzed, "Amid overall domestic and global macroeconomic instability, various expectations disappeared in a short period, leading to concentrated profit-taking pressure and a large amount of disappointment-driven selling by foreign investors and institutions. The decline on August 1 was attributable more to sentiment (investor psychology) factors than to fundamentals. Although a correction was necessary after the overheated rally, multiple psychological factors combined to result in a sharp drop."

The reduction in expectations for a US Federal Reserve interest rate cut and disappointment over the domestic tax reform plan are cited as reasons for the stock price plunge. Researcher Na stated, "The tax reform plan announced by the government on July 31 included increases in corporate and transaction taxes, and stricter criteria for major shareholders. Although separate taxation for dividend income was introduced, the conditions were tightened and the top tax rate was expanded compared to the previous bill proposed by lawmaker Lee Soyoung. The market expressed significant disappointment at the tax reform plan, which fell short of expectations. In addition, the US Personal Consumption Expenditures (PCE) price index for June rose 2.5% year-on-year, surpassing both forecasts and the previous month's figure. Coupled with the timing of US tariff applications, concerns over inflation have resurfaced, and the diminished expectations for a US Fed rate cut have negatively affected stock prices."

However, the particularly large decline in the Korean market, even as Asian stock markets generally weakened, is interpreted as a reflection of the market's deep disappointment with the tax reform plan. Kang Jinhyuk, a researcher at Shinhan Investment & Securities, pointed out, "The overwhelming decline in Korea must be viewed in light of domestic issues. Despite market expectations, the tax reform plan failed to overcome political constraints, triggering a wave of disappointment-driven selling." Researcher Na also explained, "Considering the limited declines in other Asian stock markets, such as Japan's Nikkei 225 (-0.57%), it appears that domestic factors, including the tax reform plan, played a major role in the decline of the Korean stock market."

For the time being, a period of digesting the supply overhang seems unavoidable. Kim Jiwon, a researcher at KB Securities, said, "The KOSPI has surged more than 41% from its low point in April. As policy expectations have been a major driving force, and the index continued to climb despite uncertainties such as trade negotiations, it is inevitable that the market will now go through a period of digesting the supply overhang." Researcher Lee predicted, "In August and September, the KOSPI is expected to experience a phase of cooling off and digesting the supply. In terms of volatility, September will likely see greater fluctuations than August, so the timing for strategically increasing exposure to risk assets will be September." He added, "It will be possible to approach the market from a buying perspective when the KOSPI falls below the 3,000 mark."

This week’s key events include the release of US June manufacturing new orders on August 4, Korea’s July Consumer Price Index (CPI), US July Institute for Supply Management (ISM) Services Index, and China’s July Caixin Services Purchasing Managers’ Index (PMI) on August 5. On August 7, China’s July export and import trends will be announced, and on August 8, China’s July CPI and Producer Price Index (PPI) will be released.

Major earnings announcements from the US and Korea are also scheduled. On August 4, Palantir will release its results; on August 5, AMD and Super Micro Computer; on August 6, McDonald’s, Uber, and Disney; and on August 7, Eli Lilly. In Korea, Hyundai Green Food will announce results on August 4; Ecopro BM and Kakao Pay on August 5; Hyundai Home Shopping and APR on August 6; Mirae Asset Securities, Netmarble, and LIG Nex1 on August 7; and CJ Logistics on August 8, all reporting their second quarter results.