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Fluctuations in major global stock indexes

The South Korean stock market is reeling from the shock waves of its “black October.” As if recreating the plunge in stock values that happened with the global financial crisis’s arrival in Oct. 2008, KOSPI experienced its biggest monthly drop in ten years. Future prospects also appear bleak: in addition to external risk factors like the US-China trade war and US interest hikes, the numerous potential drags of stock prices include a stagnant domestic economy, investor flight, and escalating panic. Many in the securities world see a drop below the 2000 line – widely viewed as a psychological “safety net” – as not too far away.

Korea Exchange data from Oct. 28 showed KOSPI closing at 2027.15 on Oct. 26, with a decrease of 13.48% (315.92 points) in the month of October alone – the worst plunge since Oct. 2008, when the index dropped 23.1% from 1448.06 to 1113.06 points. KOSDAQ fared even worse, plummeting 19.36% (159.2 points) to a low of 663.07 this month. Market capitalization for the KOSPI and KOSDAQ fell by 260 trillion won (US$228 billion) over the same period, with a withdrawal of over 4 trillion won (US$3.5 billion) in foreign investor funds.

The main factors behind the plunge include a mixture of fears about growth and trade tailing off amid the US-China trade conflict, along with the effects of a US interest rate hike. The big issue is that South Korea’s stock market is more sensitive to these external factors than the stock markets in other major economies. The pan-European STOXX 600 index fell by just 8% this month; China’s SSE Composite Index fell by 7.9%. Japan’s Nikkei and Hong Kong’s Hang Seng respectively dropped by 12.17% and 11.05% – both less than KOSPI.

The biggest reason mentioned for the South Korean stock market’s precipitous drop compared to others in major advanced and emerging economies is the economy’s high level of dependence on foreign trade. The major role of exports in the economy translates into a high risk that the economy will go into recession as trade wars cause them to decrease. Other factors cited in its steep slide include an imbalance in supply and demand with both foreign investors and institutions showing a selling trend, along with its relatively free capital inflows and outflows.

With stock markets declining again on Oct. 26 in the US (-1.19% for the Dow Jones) and Europe (-0.77% for STOXX 600), the bear market in South Korea appeared poised to continue on Oct. 29. The drop in the US stock market suggests a possibility that KOSPI – which dipped as low as 2008.87 during trading on Oct. 26 – could plunge beneath the 2000 mark. Many in the securities community are suggesting the new “safety net” line should be seen as falling in the low to mid-1990s range.

Some analysts contended that the declining performance for US companies that brought on the current jitters is actually setting the stage for a market rebound.

“The policies of President Donald Trump [with the US-China trade war] and Federal Reserve [with its interest rate hike] are starting to clearly manifest as detrimental to the performance of US companies,” said Shinhan Investment senior researcher Kim Yoon-seo.

“Over time, it appears inevitable that the shock to the stock market will beginning applying downward pressure on the real economy, and there will need to be changes to the Fed and President Trump’s current policy approach to save the US stock market. That could open up some breathing room for liquidity on the South Korean market,” Kim predicted.

Even under that scenario, a bear market (a condition in which securities prices fall and market pessimism leads to continuous a downward spiral in the stock market) looks unavoidable in the short term.

“For any meaningful rallying to happen, there would need to be a cooling-down of trade conflicts or a relaxation of austerity, and both of those things take time,” said KB Securities analyst Lee Eun-taek.

“Even if there were some dramatic easing of the trade conflict between the US and China, we have over a month left before Trump and Chinese President Xi Jinping meet at the G20 summit, and the Fed is not going to immediately change its approach just because stock prices have fallen sharply,” Lee said.

On Oct. 26, the Wall Street Journal predicted the Fed would stick to its gradual approach to interest rate hikes in spite of the recent stock price tumble after seeing the strong third quarter growth rate for the US economy.

Other new risk factors that have emerged recently include Italy’s financial woes and the slaying of Saudi Arabian journalist and anti-government critic. Trends in the domestic economy appear similarly poor, including predictions of a drop-off for semiconductors and downward adjustments to growth rate projections. In the securities committee, the prevailing view is that growing uncertainties and mounting risk factors mean the stock market is unlikely to gain purchase with a recovery for some time.

By Lee Soon-hyuk, staff reporter

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