Lee Sung Soo, Sung Ah Hwang

Investing.com: The Year of the Tiger is Here! The stock market’s 2021 performance has been a disappointment. Investors are eager for 2022. While 2022 may be viewed as an aggressive year and the yea of the tiger, another view suggests that investors should be aware that there are threats waiting for them.  

The stock market should start in 2022 if liquidity is returned

The Korean stock market suffered a severe loss in the second half 2021.

These problems will likely be solved in the early part of 2022 due to tax reform and a new year. Large investors will be able to evade the large shareholder transfer taxes by reinvesting their funds in stock markets. The passive liquidation and suppression of household loan debt funds is likely to increase household loan burdens, even for a brief time, during the new year. 

At the very least, 2021’s liquidity headwinds should no longer be headwinds. There is reason for optimism that liquidity will flow back into the market by 2022. This should provide a slight tailwind to valuations. The liquidity inflow will bring some relief to the majority of small and mid-cap stock that were affected by the frost during the second half last year. 

However, investors face numerous threats in 2022 

Investors can expect a rebound in the stock market by 2022. However, it is important to remember that there are still risks. Although there are many risks, the two most serious negative news items are worth focusing on. Global monetary tightening is the first possible downside. In December at the FOMC the Fed accelerated the tapering rate from $15 to $30 billion per monthly. QE will end next March. It seems probable that interest rates will rise almost immediately following that.

[Long- and short-term interest rate difference between 10-year US Treasury bonds and 2-year Treasury bonds since 2012] 

Near the end stage of tapering and when the key interest rates reaches 1%, the gap between long-term US Treasury yields and short-term tends to reverse. The market will experience volatility if the yield curve is inverted, as market participants learned from the Summer of 2019 and other historic cases. However, the global economic recovery and any headwinds to the yield curve or interest rates can be overcome, which could delay the onset any downturn or crisis. 

There is a second possible negative aspect to the Korean market, specifically that there may be a shortage of investor demand due the financial investment income tax which will go into effect in 2023. 

One of the key characteristics of the 2020 stock market has been increased investor participation. The KOSPI index soared to the 3000 point level thanks to this new investor power. This is known as the Donghak Ant Movement in the history of the stock exchange. It is clear that the Korean stock market reached new heights due to individual investors. Only in 2020, there was a net increase of 100 trillion won (83 billion USD) in individual personal investments funds. In 2021, it exceeded 70 trillion won ($58B) in net personal investment fund growth. This was the biggest private liquidity inflow ever recorded. 

Investors are uncomfortable about one thing: the implementation of the financial income tax system in 2023. Many investors intend to withdraw funds and invest in stocks up until the financial investor income tax is implemented. This means that liquidity could flow out of markets by the end the year before any new system is put in place. Market volatility could result from this trend, which is the opposite of the 2020 Donghak Ant Movement. Any tiger momentum could be overwhelmed by this reverse ant march.

Still, there are reasons to remain positive about 2022’s stock market 

There are risks to the stock markets in 2022. However, there could be a positive January effect. Global liquidity that has loosened since the initial pandemic outbreak in 2020 may trigger an economic boom similar to those of the mid-2000s. There are many downsides, however, the upside surprise can be like those of the famous chakhogapsa, or tiger hunters, who helped to manage the risk and propel the stock market higher. 

They are usually priced in because they are already known. Rather than overlooking the potential downsides, why not think about 2022 like this? While 2020 had a positive outcome due to the retail investor movement and 2021 was hit in the second quarter by liquidity problems, 2022 will be a year that has both of these potential downsides. Investors with the right mental preparation can still make solid investments in volatile markets. 

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