KOSPI will bounce back in 2nd half on hopes of end to rate hikes

By Lee Min-hyung

Korean stocks will be on course for a gradual rebound in 2023 if the economy overcomes major risks posed by a recession and its subsequent shock to the real estate and fundraising markets, the research chiefs of major securities firms said Thursday in a year-end interview.

The stock market here extended a losing streak in 2022, hit hardest by freezing investor sentiment amid the ultra-hawkish moves of the U.S. Federal Reserve. Experts said the sentiment is unlikely to take an abrupt turn for the better until the first half of next year, and the market will show gradual signs of a rebound in the latter half, after the Fed ends its rate hike cycle.

But investors should also be wary of lingering multiple risk factors in the market, they said.

"The stock market will be burdened by the recession and its possible aftermath of heightened credit risks in the real estate and fund-raising markets," Yoon Chang-yong, head of research at Shinhan Securities, said. "The high level of prices, interest rates and the deepening conflict between the U.S. and China also come as a major risk factor to the stock market."

The expert said the market will display signs of a rally shortly before the Fed carries out its final rate hike, but that the outlook still remains unclear due to such external macroeconomic circumstances.

"But it appears optimistic when considering that the monetary tightening is coming to an end and China is alleviating its strict zero-COVID policy," he said.

The securities firm shared that the benchmark KOSPI would move within a range of 2,000 and 2,600 points next year, and the figure will be on a gradual rise in the second half of the year.

"Stocks in the healthcare sector look promising in that demand for medical products is on the rise," he said.


Yoo Seung-chang, chief of KB Securities' research center, also concurred over the looming risk of a recession.

"We should take caution on the possibility that the rate hike-sparked shock rapidly spreads across the economy in 2023," Yoo said. "In Korea, the real estate market is slowing down, and a series of problems ― such as credit risks of real estate project financing ― emerged. We need to monitor carefully whether the risks escalate into a bigger scale."

He forecast the Fed to end its rate hike cycle in the first half, which bodes well for Korean shares.

"The Fed will increase its key rate to 5 percent, and since then, continue to freeze it until the end of 2023," he said. "But if other economic indices slow down, expectations of a possible rate cut will build up in the market."

He also predicted key U.S. economic indexes to affect the future course of the local stock market.

"The financial market will be heavily affected by the U.S. inflation and employment trends," he said. "Other factors that will influence the stock market here include China's easing of quarantine measures."

KB Securities also expected the main bourse to recover to as high as 2,610 points.

"Investors should be wary of recession-related risks in the first half of 2023," he said. "But the Fed's monetary tightening will peak in the latter half and the economy is also expected to bottom out, which will help local stocks achieve a gradual rebound."

Financial officials celebrate the closing of the 2022 stock market at Busan International Finance Center in the nation's southeastern port city, Thursday. Yonhap

Mirae Asset Securities voiced similar concerns.

"We need to monitor how seriously the aftermath of the real estate shock affects the financial market," Seo Cheol-soo, head of research at the brokerage house, said. "Companies' earnings growth is also feared to slow down at a rapid pace on growing fears of a recession."

He advised retail investors to build a diversified portfolio focusing on large-cap stocks and to take a long-term approach when making investments in this period of financial volatility.

Yoo Jong-woo, head of research at Korea Investment & Securities, picked household debt and real estate-related indexes as two key factors that will affect the future direction of the stock market and the economy.

"In Korea, the real estate market is most vulnerable to the prolonged high level of interest rates," Yoo said. "If the real estate market is hit by additional shocks, this will destabilize the overall economy at a time when the household debt-to-GDP ratio is reaching around 90 percent."

He said bank and semiconductor stocks appear promising in 2023.

"Bank stocks will be spotlighted as they generate stable revenues under the current rate hike cycle," he said. "Fears of monetary tightening will subside during the latter half and hopes may grow over the global economic recovery. Under the macroeconomic environment, investors are advised to focus on semiconductor, secondary battery and game stocks, whose valuations have so far suffered a sharp decline."

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Lee Kyung-su, head of research at Meritz Securities, said lingering geopolitical uncertainties remain as a major risk factor to the local stock market.

"If the war between Russia and Ukraine is extended to other regions or other countries intensify the conflict, this will revive fears of supply-side unrest here and abroad," he said.

He also pointed out that the alleviation of a liquidity crunch would determine the KOSPI's rebound.

"The Fed is forecast to readjust its pace of rate hikes sometime in the first quarter of 2023," he said. "But the point should be on how much the monetary policy stabilization will help ease risks of a liquidity crunch."

Yun Sok-mo, head of equity research at Samsung Securities, expected the Fed to increase its key rate by 25 basis points, respectively in February and March, and end its rate hike cycle at 5 percent.

"The outlook is in line with that of market participants, and the financial market will gradually react less sensitively to the rate change," he said. But the stock market is still exposed to fears of a global recession and the change of demand-side market environment, he pointed out.

"Market participants should also carefully watch lingering geopolitical risks surrounding Russia and China," he said.