Korean Stock Market Plunges, Can the US Endure?

On October 8th, Samsung Electronics' third-quarter operating profit reached 107 trillion won, surpassing 100 trillion won for the first time in history.

On the day of this earnings announcement, the KOSPI actually fell by 2.6%, demanding an analysis of why the Korean stock market has become more vulnerable compared to the global market.

Over the past four months since June 22nd, the Korean KOSPI has plummeted 27%, showing a divergent trend compared to major global stock markets.

In contrast, the US Nasdaq hit a new record high on October 6th, rising 5% from June, while Japanese and Taiwanese stock markets also showed similar gains.

It was also interpreted that the end of large-scale share buyback programs by SK Hynix and Samsung Electronics contributed to the stock market decline.

Globally, interest rates are rising sharply, with Korea's 10-year government bond yield increasing from 2.7% last year to 4.3% currently.

The US 10-year Treasury yield surpassed 5.3% on October 7th, reaching a 24-year high, and the 30-year Treasury yield also exceeded 5.7%, a new high since 2002.

Companies begin to face financial difficulties first from short-term debts affected by high interest rates, while the impact on long-term debts appears later.

Because US corporate bonds have relatively long maturities, typically 5 to 10 years, the effects of funds raised during low-interest periods are still sustained, so the shock of high interest rates is not immediately apparent.

In 1994, the first economic crack occurred 10 months after the Fed's tightening, and during the 1999 dot-com bubble, problems emerged 8 months after the Fed raised the base rate.

At that time, the Nasdaq index plunged from 5,100 to 1,100, suffering a significant blow, indicating a certain time lag between base rate hikes and market crises.

There is a time lag between the base rate, which is the overnight ultra-short-term rate decided by the Fed, and market rates such as 10-year and 30-year bonds traded in the market.

A time lag appears until actual economic cracks emerge after a base rate hike, and despite the AI revolution theory, headwinds from high interest rates are likely to repeat as in past cases.

In past periods of interest rate hikes, poor maturity management sometimes led to national defaults. Representative examples include the Mexican national default in 1994, the bankruptcies of maturity-mismatched companies during the 2000 dot-com bubble, and the global financial crisis caused by subprime mortgages in 2007.

More recently, in 2023, the Silicon Valley Bank collapse occurred one year after the base rate hike, demonstrating the importance of corporate and national fiscal health during periods of rising interest rates.

In June 2007, the 10-year Treasury yield reached 5.26%.

Despite rising Treasury yields, the S&P 500 index hit an all-time high in October 2007, indicating that the stock market did not immediately reflect the impact of high interest rates.

This suggests that the duration of high interest rates, rather than the high-interest rate level itself, has a decisive impact on the economy.

In the US, 90% of new home loans are 30-year fixed-rate, and a system has been established to diversify risk for financial companies through loan securitization.

In contrast, two-thirds of all loans in Korea are variable-rate, and interest rates are often renewed every five years, creating a structure where interest rate increases can immediately lead to reduced consumption due to increased household interest burdens.

The maturities of these bonds are set to arrive rapidly starting in 2027, posing a risk of increased refinancing burden at high interest rates in the future.

Companies included in the Russell 2000 index have a structure that is more vulnerable to interest rate increases compared to the S&P 500. It was emphasized that 45% of their total debt is variable-rate, leading to an immediate impact when interest rates rise.

This serves as an indicator of the interest rate vulnerability of small and medium-sized companies, unlike the large corporations in the S&P 500.

Despite the US 10-year Treasury yield surpassing 5.26% in June 2007, the US stock market continued to rise for another four months.

The stock market peaked in October before shifting to a downward trend, leading to the 2008 global financial crisis, demonstrating that a time lag exists between interest rate hikes and stock market declines.

Along with this rise in default rates, market polarization is intensifying, with 80% of S&P 500 stocks falling out of an upward trend and stock price adjustments beginning for Russell 2000 small and mid-cap stocks.

In Korea, the rapid rise from previously low interest rates is increasing the overall economic impact. In particular, two-thirds of Korean household loans are variable-rate, making them highly vulnerable to interest rate hikes.

Corporate bonds also have a shorter maturity structure than the US, with 88% having maturities of three years or less, making them exposed to high interest rate shocks more quickly.

Two-thirds of Korea's exports consist of intermediate goods, making them sensitive to US inventory adjustments. In past crises, KOSPI showed a tendency to fall before the US stock market as foreign capital was preemptively withdrawn.

When the US reduces inventory, Korean orders decrease, which is immediately reflected in the books of Korean companies, and foreign capital tends to be withdrawn first from Korea, where the market size is large and pension funds are stable.

A significant portion of Korean exports relies on intermediate goods, so when the US reduces inventory, orders for Korean companies immediately decrease, affecting domestic stock prices.

Additionally, foreign investors find it easier to sell stocks in the large and stable Korean market supported by pension funds, leading to frequent capital withdrawals. This is a major reason why KOSPI declines before the US stock market.

The impact of high interest rates reaches Korean households and US small and medium-sized enterprises first. If high interest rates of 5% or more persist for a long time, the US economy will also inevitably suffer, so it is crucial to pay attention to asset maturity management, referencing the mismatch between short-term borrowing and long-term lending during the IMF financial crisis.