FOMC meeting seen as inflection point for Korea’s stock market

On Tuesday alone, foreign investors were net sellers of 885.9 billion won ($681 million) on both the Kospi and Kosdaq. [Photo by MK DB]

The bankruptcy of Silicon Valley Bank (SVB) has hit South Korea’s stock market hard on Tuesday, with massive sellout driven by foreign investors.

Experts are urging a conservative approach for the time being because it is unclear how long foreigner investors, who have been driving the local stock market higher this year, will continue to sell.

On Tuesday alone, foreign investors were net sellers of 885.9 billion won ($681 million) on both the Kospi and Kosdaq. In March, they have net sold 1.26 trillion won worth of stocks, showing a change from their aggressive net buying in January.

In January, foreigners bought 6.55 trillion won across both markets. Thanks to their purchases, the Kospi surged in the month to the point of being called a “bunny rally,” but as the buying trend weakened in February, the benchmark index showed a sluggish trend. Foreign investors turned into net sellers this month, with a net selling spree of 1.22 trillion won on March 9.

The SVB crisis, which occurred during the bearish market, is expected to deter investors from buying risky assets in Korea and other overseas markets for a while.

Securities experts point out that it is more important to watch for the spread of potential defaults in the financial system than the SVB crisis itself.

Silicon Valley Bank in California, U.S. [Photo by Yonhap]

Research heads at major securities firms told Maeil Business Newspaper that the U.S. Federal Open Market Committee (FOMC) meeting due on March 22 will be the main variable that will determine the future direction of the stock market.

“While the SVB crisis has favored the view that the Fed will adjust the pace of its rate hike, it is unlikely to lead to a rate cut,” said Seo Cheol-soo, head of research at Mirae Asset Securities Co. “The March FOMC meeting is a key variable for the future direction of the stock market, and if inflation in Korea and the U.S. remains higher than expected, the stock market could be caught in a quagmire.”

“The second half of this year would be better as global leading indicators are likely to rebound, and liquidity will ease as the Fed stops monetary tightening,” Seo added.

Korea Investment & Securities Co. said that the investment sentiment has been dampened due to concerns that financial market instability could spread to the real-sector economy, adding that “we need to see if the plunge in the U.S. small- and mid-cap bank stocks is easing and thus we need to be defensive for the time being.”

NH Investment & Securities Co. said that while financial system risks are expanding in the aftermath of the SVB crisis, recession fears may expand if the Fed raises interest rate as expected. However, the downside rigidity is likely to be supported given that U.S. corporate earnings are forecast to improve from the bottom in the first quarter.

However, experts pointed out that the likelihood of the crisis spreading to a chain of failures among small- and mid-sized banks is limited. “The likelihood of SVB’s bankruptcy escalating into a systemic risk is limited and domestic stocks should improve as we move into the second half of the year,” said NH Investment & Securities.

Some are suggesting the second quarter as the time for a rebound in the Korean stock market, given the dynamics of corporate earnings.

“Given the extent and pace of earnings forecast downgrades for Kospi-listed companies, we expect 12-month forward earnings per share to hit a low in the early-to-mid second quarter and stock prices will rebound,” said Kim Sang-hoon, head of research at KB Securities Co.