Hong Chun-uk links stock market volatility to sharp capital shifts

Economist Hong Chun-uk identified interest rates in the United States and a sharp movement of capital out of Europe as drivers of recent stock market volatility, as rising rates put global financial markets under strain and trigger wider effects.

In a video on Hong Chun-uk's Economics Lecture Notes, he described a turbulent period of rapid capital shifts, with market participants withdrawing funds from Europe and moving them into the United States.

Capital flows into the United States as the euro weakens

The video linked developments in Europe, including student protests in France, to a weakening euro. The euro/dollar exchange rate, which until recently had held between 1.18 and 1.2, has fallen below 1.1. Meanwhile, the dollar index has risen strongly, breaking above 100.

Proceeds from sales of European bonds are flowing into United States Treasury securities, described in the video as the easiest assets to manage. Those inflows have temporarily calmed the sharp rise in United States Treasury yields, while selling pressure on euro-denominated bonds remains very strong. The video described the result as a period of dollar strength as global capital concentrates in the United States.

A stronger won eases foreign investors' selling

Despite the dollar's strength, South Korea's won has also been strong. Its value increased as the won-dollar exchange rate fell from 1,560 won per dollar to the 1,330-won range. “South Korea's won is currently the strongest currency in the world,” Hong Chun-uk said.

The stronger won creates conditions that make it easier for foreign investors to sell shares in South Korea. As the won appreciates, the dollar-denominated value of the KOSPI rises, allowing foreign investors to sell more comfortably, the video explained. The falling exchange rate has also prompted concerns about exporters in South Korea.

Momentum and contrarian strategies in a falling market

The video presented two approaches to a declining market. Momentum investors, who emphasize trends, should watch technical conditions. The KOSPI is currently below its moving average, which the video said indicates that many investors are stuck holding shares bought near market highs. Stock-backed loans and margin borrowing used by individual investors also warrant attention.

Investors focused on asset allocation could consider contrarian investing. “When the market crashes, the highest returns are also right beside it,” Hong Chun-uk said. He cited July 31, when South Korea's stock market recorded its highest one-day return in its history, noting that the preceding day had brought a severe plunge that triggered a sidecar.

When markets are gripped by extreme fear and shares in South Korea appear to have fallen excessively compared with assets in other countries, rebalancing to buy at low prices may be effective, he explained. Another consideration is that the National Pension Service, which receives about 100 trillion won in new funds each year, could buy shares in South Korea if the market falls further.

Contrarian investing brings considerable psychological strain because it requires acting against the majority view. Hong Chun-uk said that although the future cannot be predicted, investors should repeatedly follow the principle of buying when prices are low and selling when they are high, maintaining a contrarian stance during panic. He added that surviving requires effort, including studying the stories behind market movements.

Source: original video (YouTube)