The KOSPI index is writing a historic chapter as it hits 8,000, but as market interest rates surge sharply, tension is rising across the asset market. In particular, because the KOSPI's climb has been steep this year, some are offering cautious outlooks that if the high-rate phase persists, the KOSPI could correct below the 7,000 level.
According to the Korea Financial Investment Association's bond information portal on the 18th, the 10-year Treasury bond yield closed at an annualized 4.217% on the 15th. After breaking above the 4% mark on the 12th for the first time in about 2 years and 6 months, it has continued to rise. That is close to the 5-year record high of 4.632%. The ultra-long 30-year Government Bonds yield also climbed to 4.131% annually, approaching the recent 5-year record high of 4.391%.
◇ Middle East war, high oil prices send market rates soaring
Persistent high oil prices stemming from Middle East risk are cited as the backdrop for the jump in bond yields. West Texas Intermediate (WTI), which traded at $60 to $70 per barrel before the outbreak of war, is now trading around $90 to $100. Rising oil prices stoke inflationary pressure, which in turn fuels inflation fears and has acted to raise expectations for rate hikes.
In Korea's market in particular, with the Bank of Korea's monetary policy committee meeting in May ahead, uncertainty over monetary policy under the new Governor Shin Hyun-song is said to be shaking investor sentiment. In addition, as preference for risk asset has strengthened, the required expected return on bonds has risen in tandem, adding to upward pressure on yields.
Kim Ji-man, a Samsung Securities researcher, said, "The Governor said at the confirmation hearing that 'given Korea's sensitivity to oil prices, I will place greater emphasis on price stability,' which is heightening caution about a base rate hike," adding, "As the KOSPI hits a year-to-date high, higher required revenue on bonds is also a factor."
◇ How rates affect stocks: higher discount rates and credit strain
The issue is that high rates can raise the discount rate applied to asset prices and weigh on the stock market. The discount rate is the ratio used when corporations calculate the present value of profits they will earn in the future; when rates rise, the value of future revenue is assessed lower in today's terms. Growth stocks such as tech names, which command high valuations by reflecting expectations for growth far in the future, are particularly sensitive to rising rates.
On the 15th (local time), as the U.S. 30-year Treasury yield rose above 5%, hitting a 19-year record high, leading U.S. tech corporations Nvidia, Micron and Intel slumped 4.42%, 6.69% and 6.17%, respectively. That day in Korea, Samsung Electronics fell 8% and SK hynix dropped 7%, entering a short-term pullback.
Experts see no problem with the fundamentals of Samsung Electronics and SK hynix themselves. Both companies continue to see upward revisions to results. However, given the KOSPI's steep climb, they analyze that if high rates act as a trigger, it could provide a pretext for declines. According to Meritz Securities, as of the 15th the KOSPI price-earnings ratio (PER) is 7.56 times.
Hwang Su-uk, a Meritz Securities researcher, said, "As the KOSPI has risen sharply this year, the deviation from the moving average remains 7.8% above, even after Friday's correction," adding, "In a short-term overheating phase, if high rates act as a trigger, the KOSPI could revert to its average deviation level and fall to 6,950 points."
Over the long term, there are more structural risk factors. AI big-tech corporations are aggressively executing capital expenditures (CAPEX) through massive borrowing, raising concerns that if high rates persist, interest costs could worsen earnings. Google recently issued 100-year corporate bonds and also unveiled plans to issue Samurai bonds in Japan.
For Korean semiconductor corporations, the view is that because earnings improvement is driven by higher average selling prices (ASP), not leverage-based revenue, the direct hit from interest costs is limited. However, if U.S. big tech's results slow due to the effects of high rates, it could be difficult to sustain the strong demand for semiconductors from Samsung Electronics and SK hynix, which is a headwind.
◇ Where Korea's stock market is headed
The market expects a volatile trading pattern to continue while high rates persist. Lee Eun-taek, a KB Securities researcher, said, "Over the past 120 years, three stock bubbles all burst after being triggered by rising rates," advising, "In a high inflation and stock bubble phase, all attention should be on rate trends."
In the short term, some expect the end of May, when rate uncertainty could ease. Kim said, "Even considering the Middle East issue, current rate levels are an excessive overshooting," adding, "After the May Monetary Policy Board meeting and once a downtrend in oil prices is confirmed, rates are likely to stabilize with a lag."
Others think high rates will persist. In that case, a real hit to corporate earnings is inevitable. Kim Young-ik, a professor at Sogang University's Graduate School of Economics, said, "Ultimately, to lower long-term rates, a base rate cut is needed, but with inflation high, it is not easy to decide on a cut, leaving little room for authorities to respond," advising, "Because the KOSPI is likely to fall in the second half, investors should reduce their stock weights."