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A Comparative Look at Global Stock Market Performance After Covid-19 Spread
2020 Oct/06
A Comparative Look at Global Stock Market Performance After Covid-19 Spread Oct. 06, 2020 PDF
Summary
Hit hard by a synchronized plunge during the global spread of Covid-19, stock markets in major economies seem to be treading different paths depending on the size of shocks and market-specific characteristics. It is analyzed that the recovery was faster in a market with a lower decline in 2020 growth outlook, a higher IT sector weight, and more stock market liquidity. Meeting all of those three conditions, Korea’s stock market has been outperforming its peers. However, the real factor behind Korea’s solid growth outlook and quick recovery in the stock market could be the nation’s relative success in containing Covid-19. Hence, the possibility of another wave of the virus could be all the more threatening than anything else to Korea’s stock market.
Stock markets in major developed economies have been recovering from the turmoil in late March amid the spread of the Covid-19. This is attributable to expectations for economic recovery as one nation after another managed to curb the pandemic and eased the lockdown measures. Another reason could be massive liquidity injected into the market by monetary loosening policy around the globe. Although the pace of the spread is somewhat subdued, there are signs of another outbreak, with the number of new infections exceeding 250,000 per day in the world. This makes future prospects all the more uncertain. 

Against the backdrop, this article tries to assess the factors affecting the performance of major stock indexes after Covid-19 spread to the globe. Presumably, the common factors behind abrupt market downturns between mid-February and mid-March include a possible global economic recession and an abrupt decline in oil prices, which made major stock indexes move in sync. Also in play were temporary shocks such as abrupt capital outflows and dampened investor confidence. However, with the looming impact of the virus on the real economy and the influence of several policy measures, the markets appeared to begin heading in a different direction.
 
Figure 1 illustrates the returns on major stock indexes since the first death of Covid-19 was reported on January 11, 2020. The returns include the lowest return measured between January 11 and the date when an index hit the bottom, and the return during the whole analysis period between January 11 and August 31, 2020. It was found that the lowest return reached as low as -34% on average, while the whole-period return stood at -10% on average, showing a marked rebound of 36 percentage points from the bottom. A quite large gap between the lowest and whole-period returns was observed across countries where the lowest gap was 8 percentage points in Mexico with the highest being 58 percentage points in Argentina. Among the 35 analyzed nations, a total of 5 countries saw their stock index rebound above the level on January 11. Korea is one of those countries.
 
 

 
Real economic shocks and stock market performance

The most fundamental element affecting stock indexes in the Covid-19 era is the size of shocks to the real economy. Figure 2 demonstrates a comparative look at economic growth rates in 2019 and growth forecasts for 2020 across nations (June outlook by the OECD and the IMF).1) The average outlook for 2020 stood at –6.9%, which translates into a decline by 8.9 percentage points from 2019 growth rates. This implies the Covid-19 impact is greater on the real economy than that of the 2008 global financial crisis. Growth forecasts for 2020 are quite low at below -10% in Italy, Spain, France, and the UK, whereas the figures are relatively sound at -2% or above in China, Indonesia, and Korea. In particular, the size of decline for Korea marks the lowest at 3.7 percentage points among analyzed nations.

Figure 3 illustrates the correlation between the size of changes in growth rates, and stock index returns during the period between January 11 and the announcement of June outlook. The results confirmed a lower stock index return as the size of changes in growth: It is observed that a decline of 1% in growth outlook leads to a decrease of 1.5% in stock index returns. With the analysis period extending to end-August, the gaps across nations rose further: A 1% decline in growth outlook is found to bring down stock index returns by 2%. What’s notable here is that there is no evident correlation between the size of changes in growth and the lowest return after Covid-19, implying the size of real economic shocks reflected when a stock index rebounds. Also confirmed in this analysis is that market expectations for a relatively mild decline in Korea’s economic growth were behind Korea’s fast stock market recovery from the turmoil.
 

 
The core factor behind 2020 growth outlook appears to be the level of Covid-19 transmission. It’s quite evident that the spread of Covid-19 led to lockdowns, manufacturing cuts, lower demand, and less trades, which in the end grew into an economic recession. Hence, a convincing argument could be that a nation with more Covid-19 cases will see a larger decline in its 2020 economic growth. Figure 4 demonstrates the correlation between the cumulative confirmed cases per one million people and the changes in growth rates between 2019 and 2020. It was observed that the 2020 outlook was lower than 2019 in nations with more cumulative Covid-19 cases as of when the OECD and the IMF released their forecasts in June 2020. The estimation equation used in this article reveals that a three-fold increase in cumulative confirmed infections per million could lower 2020 economic growth outlook by 1%. Compared to other developed nations, Korea’s cumulative number of Covid-19 infections was relatively low at 240 per one million as of June 2020, and the number has been still quite low.2) This in part affirms the importance of effective quarantine measures in efforts to avoid a recession.


Stock market characteristics and index performance

This part of the article tries to assess market-specific factors that could affect stock index performance after Covid-19 spread. The virus’s transmission quite dramatically pushed up demand for healthcare and contactless digital services, which helped bring healthcare and IT sectors to the forefront of attention. Many expect the Covid-19 pandemic to trigger an abrupt shift in the mode of economic activities away from offline towards contactless and digital. A probable assumption under the circumstances could be that stock index performance is higher in a nation with higher IT and healthcare sector weights. Figure 5 demonstrates the correlation between IT/healthcare sector weights (as of end-2019) and stock index returns from the Covid-19 outbreak up to late August. One of the findings is that the higher the IT sector weight, the higher the stock index return, which is found statistically significant. The same was also observed in the healthcare sector, but its statistical significance is somewhat limited. For the case of Korea, its IT sector weight stood at 37%, marking the second highest after Taiwan among the nations analyzed. This could be one of the major drivers for the stock market rebound.
 

 
Another market-specific factor is liquidity in a stock market which is a basic element to price efficiency: The more abundant the liquidity, the faster stock prices approach to the intrinsic value. With sufficient investors with diverse investment purposes and trading demand, the market could effectively absorb shocks to forge a fast recovery. In other words, liquidity means resilience. Figure 6 shows the correlation between turnover ratios (the average between 2015–2019) and stock index returns between the time of the Covid-19 outbreak and end-August in selected major stock markets. What’s observed here is a tendency where higher stock market liquidity leads to a higher market return. Among the stock markets analyzed, Korea ranked third in turnover, showing that abundant liquidity could be another factor behind stock index performance. 


Possibility of overvaluation

Although the solid performance of the Korean stock market seems to have stemmed from economic factors, there is still a possibility of overvaluation caused by positive outlook and higher market liquidity, given that the stock index is well above the pre-Covid-19 level. Because it’s hard to assess the level of overvaluation in a whole stock market, this article takes an indirect approach via sector performance in Korea’s stock market. Figure 7 is a comparative look at returns on Korea’s sector indexes and the MSCI All-Country World Equity Index (ACWI).3) Korea’s healthcare, materials, and energy sectors showed relatively higher returns, while IT, consumer discretionary, and utility sectors were found to underperform. Also notable were Korea’s healthcare and materials sectors whose returns were 58 and 39 percentage points higher than those of the global market. Although the difference could have stemmed from each index’s different subsector composition, it’s worth carefully watching for a possible overvaluation as the two sectors in common showed a short-term surge.4) On the other hand, Korea’s IT sector yielded a 3% return, which is 24 percentage points lower than the global sector index. Although the high percentage of IT in Korea’s stock market did contribute to a fast recovery, it still underperformed the global IT sector. A possible explanation could be Korea’s low percentage of software—the most lucrative area—in the IT sector.
 


 
Conclusion

Thus far, this article took a close look at what affected the performance in 35 stock markets for eight months after the Covid-19 outbreak. It is found that after the market turmoil, stock markets in major economies are treading differentiated paths for recovery depending on the size of shocks and market-specific characteristics. According to the analysis, the recovery seems relatively faster in market with a lower decline in 2020 growth outlook, a higher weight of the IT sector, and more abundant market liquidity. Korea’s stock market meets all of those three conditions, which could have helped it record the fourth highest return among 35 nations analyzed. However, some sectors’ markedly high returns compared with global sectors require some caution. Also notable is that Korea’s sound growth outlook and solid recovery in the stock market fundamentally stemmed from its success in reining in the spread of Covid-19. At this juncture, it’s worth noting that the biggest threat to Korea’s stock market is another wave of Covid-19.
 
1) For nations that have forecasts available from both the OECD and the IMF, I computed the average. If there’s only one forecast, that figure was used. OECD forecasts are based on a single-hit assumption.
2) As of August 31, 2020, Korea’s cumulative confirmed infections reached 389 per million, which equals 1/47 of infections in the US, 1/27 of Spain, 1/13 of the UK, and 1/7 of Germany. 
3) The MSCI ACWI is an index including large- and middle-cap stocks in 23 developed nations and 26 emerging markets. 
4) Korea’s healthcare sector was observed to sharply rise 30% in early-June, with the materials sector climbing 20% in early-August.