Professor Kim Young-ik Forecasts a 'Sideways Correction' for the Stock Market in the Second Half and First Half of Next Year

He said he would forecast the stock market's trajectory for the second half of the year and the first half of next year based on these two core factors. He stressed that when liquidity increases alongside a strong economy, share prices can rise further, and added that analyzing the combined influence of the economy and liquidity is important.

When this index rises, the economy can be judged to be improving; when it falls, the economy can be judged to be deteriorating. Because the coincident index directly reflects present economic conditions, it plays an important role in understanding the current economic flow.

The current coincident composite index cyclical component is above 100 and rising, indicating that the economy is in a recovery phase. However, the stock market always moves ahead of the real economy, so Professor Kim stressed paying attention to the leading composite index cyclical component. This means it is difficult to fully predict the future of the stock market from current economic conditions alone.

The leading index bottomed in April 2023, rose steadily through June, and share prices rose sharply in step. This suggests that leading indicators can serve as an important signal for stock investment strategy.

He added that a large gap can be read as a sign that share prices are likely overvalued relative to the real economy.

As of June, the gap between the leading and coincident composite index cyclical components stood at 5.4%, which he said was the highest level since 1998. He analyzed this as a clear indication that share prices have risen excessively relative to the real economy. This gap ratio is interpreted as an important signal pointing to the possibility of a correction in the stock market.

He expects the current gap to narrow going forward. For the gap to shrink, either the coincident index must rise or the leading index must fall. While a rise in the coincident index is possible, he placed more weight on a decline in the leading index. In particular, he analyzed that the sharp drop in the KOSPI in July will be reflected in the leading index and become a major factor narrowing the gap.

The index peaked in March, declined, rebounded briefly in June, and then fell again in July. This suggests the leading composite index cyclical component is also likely to decline soon. Looking at past cases, he pointed out that when the gap between the leading and coincident indices narrowed, share prices also corrected.

He analyzed that once the gap between the leading and coincident composite index cyclical components narrows, the trend tends to persist for at least a year. Because share prices have fallen sharply in the short term, he said further steep declines are unlikely, but he forecast that the market will likely stay in a low trading range and correct for a considerable period. This suggests investors need to look at the market from a long-term perspective.

When liquidity expands during a strong economy, share prices tend to rise even further. M2 (broad money), published by the Bank of Korea, is a representative indicator of liquidity. M2 represents the amount of money circulating in the economy and serves as an important barometer of stock market liquidity.

He pointed out that M2 growth reached 11.7% as of May, indicating very rapid expansion. This means a large amount of money is circulating in the economy. High M2 growth has contributed to stock market liquidity, but it can also raise concerns about future changes in monetary policy.

Base rate hikes are a measure to absorb market liquidity and stabilize prices, and they can also affect stock market liquidity.

It fell to 116% after the sharp July decline, but remains well above its past average. This means KOSPI market capitalization has grown excessively relative to the money supply, suggesting latent pressure for a correction.

He pointed out that although a lot of money has been released into the economy, the KOSPI has risen far more than the increase in money supply. He said this divergence is likely to narrow over time, which means share prices may correct. In other words, as the ratio reverts toward its past average, the stock market may come under downward pressure.

Customer deposits, which stood at 84 trillion won at the end of last year, rose to 140 trillion won in June before shrinking recently to 103 trillion won. Equity fund assets also surged from 209 trillion won at the end of last year to 381 trillion won this year, but have recently declined to the 330 trillion won range. These fluctuations in funds around the stock market reflect shifts in investor sentiment and market liquidity flows, and the recent decline suggests rising caution toward the market.

Looking at the ratio of customer deposits plus equity fund assets to KOSPI market capitalization, he noted it still has not moved far from its long-term average and is below its past average except for the exceptional case of 2007. Although a large absolute amount of funds flowed into the market in the first half of this year, the KOSPI rose alongside, so the relative inflow as a share of market capitalization was not large. He explained that this means the apparent increase in liquidity has limits as a sustained driver of the market.

Because market capitalization grew along with the rise in the index, the absolute size of liquidity indicators has increased, but their relative capacity to support prices has weakened, in his analysis. This can be read as a warning that, without additional fund inflows, it will be hard to sustain current share price levels.

A rate inversion like the current one reduces the appeal of stock investment.

He expects the gap between dividend yields and bank rates to narrow over the medium term, and believes this will take at least six months and possibly up to a year. He anticipates that funds will flow in earnest only after bank deposit rates fall sufficiently and the stock market regains its appeal. This suggests the market should be watched with a long-term view rather than expecting a short-term rebound.

In conclusion, Professor Kim analyzed that the leading economic index, which determines the direction of stock indices, is likely to turn lower before long, and that liquidity around the stock market is also shrinking. He therefore forecast that, while there may not be another sharp correction in the near term, the KOSPI will likely enter a correction phase over the next six months to a year. Investors need to prepare for this change in market conditions.