[Column] SVB’s fall and Korean stock prices

Although corporate earnings, which determine stock performance, still remain weak, they are expected to recover within the year. I hope stock investors hang tough just a little longer.

Shin Seong-ho

The author is a former CEO of IBK Securities. The fog over the stock market has gotten thicker. The failure of Silicon Valley Bank (SVB) — the second largest bank collapse in American history — has caused panic across the equity markets around the world. Some fear the bank failure in the United States could trigger a repeat of the contagious catastrophe in the wake of the Lehman Brothers bankruptcy in 2008.

Compared to the complexities involving derivatives and risky mortgages behind the Lehman Brothers downfall, SVB’s troubles are relatively simple and small in terms of money flow. Given the speedy emergency actions from the U.S. federal government and central bank to contain the latest financial crisis, the cross-border spillover won’t likely be that big. The Federal Reserve would, of course, moderate its tightening steps in the short term depending on convulsions in U.S. financial markets, but the Fed won’t likely derail its tightening campaign to bring down inflation to manageable levels. In the bigger context, inflation and interest rates in the U.S. will remain the primary factors for the stock markets in the United States and abroad.

The U.S. consumer price index (CPI) rose 6.4 percent on year in January and the core personal consumption expenditures (PCE) price index — an inflation gauge preferred by the Fed — increased 4.7 percent. Given the still-hot inflation readings in the U.S., the Fed would have to keep raising its benchmark rate for a little longer.

The federal funds rate has been yanked up to the 4.5-to-4.75-percent range — the highest since 2007 — but still remains far below the inflation rate. Since the introduction of the benchmark interest rate system in 1954, the funds rate had hovered below the CPI only in the wake of the 2008 meltdown. Also, the last time the benchmark 10-year Treasury note yielded less than the inflation rate was in the wake of the Covid-19 outbreak. In that sense, the current tightening policy of the Fed can be a process of normalizing what has been abnormal. It is reasonable to predict that a real turning point in the Fed’s rate hikes would come only when the inflation rate comes down way below the base rate.

If interest rates keep going high in the United States, other parts of the world will inevitably have to try to catch up. Korea’s base rates also will have to go up. But a lengthy tightening can slow the economy. In the U.S., when the benchmark rates rose 10 times from 1954 to 2019 due to strong inflation, its growth rate suffered. Whenever that happened, Korea’s economy and stocks received the blow.

As the Fed’s rate hike bolsters the dollar value while weakening the Korean won’s value, it dampens the appetite for Korean stocks among foreign investors who are sensitive to the exchange rate. For instance, foreigners started to buy more Korean stocks from July last year but they purchased them when the dollar weakened and sold them when the greenbacks strengthened. This is why higher interest rates in the U.S. can be bad news for the Korean stock market.

But the interest rate factor is expected to have a temporary — and limited — impact on the Korean stock market. As the Fed is committed to continuing with the rate hikes, it can work positively for the Korean stock market, ironically. (Despite the distraction from the SVB collapse, Fed Chair Jerome Powell said the U.S. rates will be headed higher.) That means that the stronger the Fed moves toward rate hikes, the sooner the tightening end will arrive.

If the Fed raises the rate by half a percentage point at the March 21 to 22 meeting, the tightening peak will likely fall around June or July based on the Federal Open Market Committee (FOMC) calendar. For stock investors, that means they can finally shake off the heavy uncertainty from the rate hikes. In addition, a history chart since 1984 shows that the market yield peaked out in less than four months before the peak of the base rate. That means the stock market won’t have to put up with the upset over the Fed hikes for long.

The impact of rate hikes on the stock market can be measured from past cases in the United States. In the 10 rate hikes, stock prices fell more sharply than this time on four occasions. Of the four, three had been coupled with external shocks — the oil crisis in 1970, the dotcom bubble burst in 2000 and the global financial crisis in 2008. In those three cases, external shocks weighed heavier over the U.S. stocks than high interest rates.

Since the SVB demise would not have as big an impact as the past three external shocks, the stock market is expected to move in linear trend with the past six non-extraordinary episodes.

An upside to Korean stocks is a potential fund inflow. Let’s first look at foreign investors. Once the rate increase winds down by June or July, the greenback’s rising pace also will be slowed. In particular, the U.S. economy’s weight in the global economy also affects the long-term trend of the dollar. According to the International Monetary Fund (IMF), the U.S. share in the global economy is expected to stagnate from this year and weaken through 2027.

Against such a backdrop, the dollar may have peaked out in October last year when it hovered above 1,400 won. The growing possibility of the dollar entering a weakening phase will function as a factor for foreign investors to purchase more Korean stocks. Foreigners have bought 17 trillion won ($13 billion) worth of Korean stocks since July last year when the dollar hovered over 1,300 won. This suggests that foreigners think the won weakening beyond the 1,300-won level too excessive.

When corporate earnings will bottom out is another factor to look out for. Analysts project income of Korean listed companies will bottom out in the first quarter. U.S. corporate income is expected to increase from the first quarter to the first quarter of 2025 as a result of reduction in their expenditures and hikes in their product prices. Of course, analysts’ forecast cannot be entirely reliable. Still, corporate earnings would likely bottom out at least within the year.

Signs of stabilization in the global economy, which is directly linked to profits of Korean companies, are found in international forecasts. In January, the IMF upped this year’s global economic growth estimate from the previous 2.7 percent to 2.9 percent. This can be an upside for the Korean economy heavily relying on external demand.

The consumer confidence index (CCI) of the OECD, based on Group of 20 economies, has been on a steady recovery since July last year. The OECD’s composite leading indicator (CLI) and business confidence index (BCI) are still headed downwards, but the pace in their fall has significantly eased. The data implies that the global economy is creeping back north. Charts since 1994 show that global stocks benefited if any one of the three indices mentioned above turned positive.

Recent fluctuations of stocks in major economies also back the argument for stabilization in the global economy. Benchmark stock indices in the UK, France and other major European markets have hit historic highs this year. Asian countries like India, China and Japan, and North American markets, including Canada and Mexico, also have shaken out of their bearish trend. Such movements bode well for the Korean stock outlook, as the Korean market tends to follow major exchanges after a time lag.

But we are still passing a foggy phase in the stock market. Economic recession and foreign exchange volatility from the repercussions of high U.S. interest rates pose as lingering uncertainties. More upsets like the SVB crisis also could pop up. But the interest rates at home and abroad are nearing their peaks, and the global economy is slowly recovering. Although corporate earnings, which determine stock performance, still remain weak, they are expected to recover within the year. I hope investors hang tough just a little longer.

Translation by the Korea JoogngAng Daily staff.