Why Is Volatility Still High After the War? Factors Driving Stock Market Swings [Click eJongmok]

Even with a US-Iran ceasefire, normalization in the Strait of Hormuz remains distant

Tightening monetary policy adds uncertainty

Defending against volatility by shifting to sectors like machinery and shipbuilding

There are expectations that the unprecedented volatility in the Korean stock market this month will continue even after the end of the war between the United States and Iran. This outlook is due to several unresolved factors, including excessive concentration in the semiconductor sector, the introduction of single-stock leveraged ETFs, and the ongoing shift in global monetary policies. Analysts suggest that it is necessary to respond by increasing portfolio allocations to sectors such as machinery and shipbuilding.

On June 17, Eugene Investment & Securities diagnosed that the Korean stock market is experiencing record-high volatility. In fact, during the sharp decline in the KOSPI early last week, the KOSPI 200 Volatility Index (VKOSPI) surpassed the levels seen during the 2008 financial crisis and the COVID-19 pandemic. Typically, since volatility and stock prices move in opposite directions, a rise in volatility is often interpreted as a signal that the existing stock price trend may change.

The surge in stock market volatility in Korea is attributed to the excessive concentration in the semiconductor sector. The introduction of single-stock leveraged ETFs tracking stocks such as Samsung Electronics and SK hynix, implemented on May 27, also played a role. In addition, the possibility of changes in interest rate policies has further fueled volatility.

The potential for changes in interest rate policies remains a crucial variable. Jae Hwan Heo, a researcher at Eugene Investment & Securities, referenced the case after the 1998 collapse of Long-Term Capital Management (LTCM) in the United States, when the Federal Reserve cut interest rates three times, only to raise them again from June 1999 to May 2000. During that period, as the benchmark interest rate increased, stock market volatility also rose.

He analyzed that the current situation is similar. Even if the Federal Reserve does not raise rates in June or July, major central banks such as the European Central Bank (ECB) are gradually shifting toward tightening, with the Bank of Japan (BOJ) and the Bank of Korea also likely to follow. During periods of monetary policy transition, stock market volatility tends to increase.

Given these circumstances, he judged that even with the easing of war risks, it would be difficult for volatility to subside quickly. This is because resolving issues such as the Hormuz Strait shipping tolls and the normalization of oil production facilities will take time, and the transition in monetary policy is not yet complete, with only the pace remaining as a variable.

He also assessed that it is still difficult to say that foreign capital flows have fully reversed. Although the recent selling by foreign investors has subsided, it is too early to interpret this as a shift to net buying. Heo commented, "High volatility increases fatigue among long-term investors," and explained, "The recent consecutive selling by foreign investors appears to be an attempt to reduce volatility, rather than a result of fundamentals deteriorating."

Under these circumstances, he advised responding by increasing allocations to sectors that have undergone recent adjustments. Heo stated, "There is no need to reduce allocations to leading sectors such as semiconductors and IT hardware," and added, "However, it is necessary to increase exposure to sectors such as IT home appliances, electric equipment, machinery, and shipbuilding, which have seen corrections since May, in order to mitigate the heightened volatility caused by excessive concentration in semiconductors."

This content was produced with the assistance of AI translation services.