(Bloomberg) -- South Korean stocks and the currency could come under pressure as policy makers consider stricter social-distancing measures and a lockdown amid a flareup in Covid-19 cases.
Such concerns saw the benchmark Kospi index and the won slip early on Wednesday, although losses were pared after a senior health ministry official denied market rumors that authorities will raise social-distancing rules to the highest level.
“Markets may correct a bit, about 1% or 2%,” said Seung-Hoon Lee, head of equities at DB Asset Management. “Still, I don't expect a crash like we saw in March because everyone expects a potential lockdown, and the expectation of the worst scenario has been priced in.”
South Korean assets have rallied since their March lows, with the benchmark Kospi index rising more than 60% and the won gaining almost 8%. A ban on short-selling of equities has been in place since March, sparking record inflows from retail investors. The Bank of Korea is expected to hold its key policy rate at a record low at its meeting Thursday.
Read more: BOK to Hold Rates, Cut GDP View as Virus Spikes: Decision Guide
Tougher social-distancing rules and restrictions on the opening hours of cafes and movie theaters could dampen business activity and sentiment, threatening a recovery in the third quarter, and weighing on the won, said Christopher Wong, a senior foreign-exchange strategist at Malayan Banking Bhd. in Singapore.
South Korean bonds also weakened amid concern Level 3 restrictions will bolster grounds for a second round of cash handouts and another extra budget.
“Level 3 of social distancing is the highest ever for the country,” Kim Doo-un, an economist at KB Securities Co., wrote in a note Wednesday. “If the alert is put for a month for the entire country, the annual GDP can drop to minus 2%.”
Still, South Korean assets could well remain resilient as recent experiences in Australia and New Zealand suggest investors are becoming accustomed to periodic virus flareups and restrictions. Australia's stock benchmark is near a five-month high and its currency is the strongest in about 18 months even as the nation's second-most populous state, Victoria, is in lockdown.
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