The ongoing stock market correction phase that began last month shows no signs of abating. Global stock markets are grappling with concerns over financial tightening in major countries and China’s economic recession. The KOSPI, in particular, has been experiencing fluctuations within the 2,500 range since August, while other major countries’ stock markets remain at lower levels compared to July. It is becoming increasingly apparent that the upward trend witnessed in the first half of this year has reached its end.
Recent developments in the oil market have further intensified the volatility. The international oil price, represented by West Texas Intermediate (WTI), currently stands at $90 per barrel – the highest level since November of last year. This spike in oil prices places a significant burden on central banks worldwide, which were counting on price stability. In our own country, escalating gasoline and diesel prices may contribute to an overall increase in producer and consumer prices. Consequently, the stock market’s performance for the remainder of the year is uncertain. Will it continue to be volatile, or will it tilt towards a clear upward or downward trend?
The emergence of unexpected inflationary pressures, coupled with concerns regarding monetary authorities, only adds to the unease. These factors, particularly in the Korean context, pose an even greater burden. For instance, real estate projects in Korea have been troubled by soaring land prices and construction costs since the second half of last year. This has had a detrimental effect on secondary financial institutions, and the situation may further deteriorate if interest rates continue to rise. Moreover, higher interest rates negatively impact expectations for global economic recovery, considering the substantial debt burden most major countries currently face. As interest rates climb, borrowers face increased burdens, and financial institutions face amplified risks.
Nevertheless, we do not foresee a definitive path towards a market squeeze or an economic recession for the second half of this year and the following year. We are currently not in a period where we can expect the stock market to display a sustained downward trend. It is highly likely that many of the aforementioned risk factors are already priced into the current stock market. We have yet to observe any evidence of an uncontrolled spread of credit risk or a contraction in economic entities’ confidence. Additionally, the government and central bank’s commitment to enhancing the stability of the financial market and the economy contribute to the overall stability of real indicators.
For instance, Korea’s credit default swap (CDS) premium, which reflects the country’s credit risk, currently stands at around 30 basis points (bps), which is significantly lower compared to the fourth quarter of last year. In Japan and China, the CDS premiums are 20bps and 70bps, respectively. Looking at leading economic indicators in major countries, we generally observe stability, either through an upward reversal or a slow decline. This contrasts with the typical financial market and economic instability often witnessed during the final phase of US-led monetary tightening. Furthermore, the volatility index, which indicates the risks associated with the stock market itself, remains at a low level.
Additionally, recent actions undertaken by the European Central Bank (ECB) suggest that monetary tightening is nearing its final stages. There is a discrepancy between the negative news circulating in the media and the positive aspects portrayed by various financial market and economic indicators. While it is possible for financial tightening to become stronger than expected if international oil prices surpass $100 per barrel, or for major financial institutions to face unexpected insolvency, making investment decisions based on these possibilities is not advisable when considering the status of various risk indicators.
Therefore, there seems to be no immediate reason to reduce stock holdings or cease investing in stocks. Although the current market conditions differ from when liquidity was abundant and stock market performance was underwhelming, it remains a prudent course of action to maintain investments.
The stock market correction phase that started last month continues. Concerns about financial tightening in major countries and China’s economic recession continue to weigh on global stock markets. In general, KOSPI has been fluctuating in the 2,500 range since August, and stock markets in major countries also remain at lower levels than in July. Although it is not a complete downward trend, it seems clear that the upward trend seen until the first half of this year has come to an end. In particular, oil prices have recently emerged as a variable. The international oil price based on West Texas Intermediate (WTI) is currently at $90 per barrel, the highest level since November last year, putting a heavy burden on central banks around the world that expected price stability. Our country is also entering a situation where rising gasoline and diesel prices may lead to an increase in overall producer and consumer prices. So, will the stock market remain volatile for the rest of the year? Or will it turn into a clear upward or downward trend? The emergence of unexpected inflationary pressures and confirmation of tensions in the monetary authorities are clearly troubling factors. Moreover, these factors put more burden on Korea. Since the second half of last year, real estate projects in Korea that have become problematic due to high land prices and rising construction costs have been affecting the decline of assets in secondary financial institutions, and this trend may accelerate if interest rates rise further . Rising interest rates also have a negative impact on expectations for global economic recovery. This is because most large countries are mired in debt. As interest rates rise, the burden on borrowers increases and the potential risk to financial institutions that lend money increases. However, at the moment, we do not believe that a financial squeeze in the market or an economic recession is a definite path for the second half of this year and next year, and that we are not in a period where we can expect the market to stock display and downward trend. Rather, it is very likely that many of the risk factors noted above are already reflected in the current stock market. It is difficult to find evidence that an uncontrolled spread of credit risk or a psychological contraction of economic entities will occur, and as the policy stance of the government and the central bank to increase the stability of the financial market and the economy is maintained , real indicators also remain stable. . . For example, the credit default swap (CDS) premium, which represents the country’s credit risk, is currently around 30bp (1bp = 0.01% point) in Korea, 20bp and 70bp in Japan and China, respectively that, which is significantly lower than in the fourth quarter of last year.. The rate of change in the leading economic index in large countries is generally stable, with an upward reversal or a slow decline. This is in contrast to the global financial market and economic instability commonly found in the final phase of US-led monetary tightening. Looking at the market itself, the volatility index, which shows the risks of the stock market itself, is also at a low level. Also, as the European Central Bank (ECB) showed this time, monetary tightening should be considered to be in its final stages ‘anyway’. There is a discrepancy between the bad news that comes out through the media and the aspects of the financial market and the economy shown by various indicators. Of course, if international oil prices rise above $100 a barrel, there is a possibility that financial tightening could become stronger than expected, or that the unexpected insolvency of major financial institutions could temporarily block the stock market. However, when looking at the status of various risk indicators, making decisions based on these possibilities is difficult to see as a desirable investment. It’s certainly different from when liquidity came in and the stock market delivered an underwhelming performance, but there seems to be no reason to reduce stock holdings or stop investing in stocks now. Head of Future Strategy Division, SK Securities
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