The KOSPI index, which plunged on the shock of the U.S.-Iran war, has recently been rebounding. The KOSPI index, which had fallen to the 5,000 level, recovered to the 5,900 level on the 18th and defended the 5,760 level on the 19th despite global variables.
Investor attention is focused on whether the KOSPI index can stage another rally like at the start of the year.
First, compared with early this year, the view on the street is not entirely optimistic. JUNGDAWN, an LS Securities researcher, said, "The stagflation narrative is strengthening," citing ▲ heightened geopolitical risk ▲ inflation concerns ▲ artificial intelligence (AI) disruption ▲ concerns about an AI peak-out as the causes.
The geopolitical risk from the Middle East war is highly uncertain in itself, but it is more lethal as it leads to higher oil prices and diminished expectations for rate cuts.
There are also concerns that a war between the United States and Iran could be prolonged. Noh Dong-gil, a Shinhan Investment & Securities researcher, said, "The lesson from the Russia-Ukraine war is that the war shock was not priced into asset prices at once," adding, "What matters is the duration rather than the intensity of the shock."
On Feb. 24, 2022, when the Russia-Ukraine war began, Brent crude spiked from $99.1 to $128.2 in 12 days. But the market-based peak in expected inflation formed much later.
The analysis is that the longer the war lasts, the energy expense shock could belatedly weigh on expected inflation, prices, and the policy path.
Concerns are also being raised about the artificial intelligence (AI) industry. A prime example is the "AI disruption" theory. There are worries that AI's disruptive innovation will lead to the collapse of revenue models at existing software firms, exposing bad loans to corporations in related industries.
JUNGDAWN said, "The AI disruption theory has recently been highlighted as an issue for private credit," adding, "Concerns about encroachment on the job market are also emerging, but the liquidity problem in private credit seems more urgent."
There also remain concerns about an AI peak-out, meaning the AI industry's growth has topped out. JUNGDAWN noted, "The worry is how much further hyperscalers that are leading AI investment can invest," adding, "This is also intertwined with Korea's semiconductor earnings."
LS Securities projected a box range for the KOSPI index. It forecast a box range of 5,000 to 6,000 points through May, with a return to an upward trend after June.
JUNGDAWN said, "For a fundamental trend reversal, liquidity policy or demand creation through AI is the key variable," adding, "In particular, around June—when Kevin Warsh, the chair-designate to succeed Federal Reserve Chair Jerome Powell, is expected to start a term—is the time to carry expectations."
Shinhan Investment & Securities presented three scenarios. Under a V-shaped rebound scenario, it saw the KOSPI index needing to break through 5,840 points and the KOSPI 200 index 873 points. It also saw the won-dollar exchange rate needing to find downside stability around 1,485 won.
As the base case, it presented a box-range sideways move. This scenario assumes the KOSPI index moving sideways between 5,300 and 5,840 points and the KOSPI 200 index between 800 and 873 points. The exchange rate also stays elevated, and while foreign selling pressure eases, it does not fully turn to net buying.