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A display at the Korea Exchange in Seoul’s Yeouido district shows the KOSPI index soaring on Dec. 18. (provided by the Korea Exchange)

South Korean stocks have gone from strength to strength. On Nov. 23, the KOSPI index returned to a historic high of 2,602.59 points for the first time in two years and 10 months. Since then, it has broken that record many times over. On Dec. 18, it closed at a record 2,772.18 points. These new highs come amid a trend of net selling by foreign investors. The KOSPI soared as high as 2,782.79 points during trading on Dec. 14.

The index’s plunge below 1,500 points (1,457.64 on Mar. 19) shortly after the COVID-19 pandemic erupted now feels like a distant memory, with many analysts predicting a new era of the index rising to 3,000 and above. Most domestic securities firms have projected KOSPI highs of over 3,000 for 2021. Shinhan Investment projected 3,200, and Daishin Securities 3,080. In a report published early this month, the global investment bank JPMorgan projected a 2021 KOSPI target of 3,200, predicting rising profits for major South Korean companies.

The strength of South Korea’s stock market stands out even in comparison with other countries. According to Koscom, a financial IT company launched by the Finance Ministry and the Korea Exchange (KRX), South Korea recorded the highest rates of return in comparison with lows in February and March among all major economies, with respective rates of 91% and 118% for the KOSPI and KOSDAQ indexes as of Dec. 9. Other rates of return over the same period included 86% for NASDAQ, 83% for Brazil, and 80% for India. These rates were far above those of Japan’s Nikkei (64%), Germany (62%), Shanghai (27%) and Hong Kong (26%).

The common wisdom that the stock market anticipates the real economy by three to six months can help explain the rise in stocks. The dominant prediction is that South Korea’s economy next year will be far rosier compared to the struggles of 2020 amid the COVID-19 pandemic. Many institutions have predicted that while South Korea will be hard pressed to avoid negative growth in 2020 (with both the Bank of Korea [BOK] and the Korea Development Institute [KDI] projecting levels of -1.1%), it should achieve a growth rate of 3% or higher in 2021 (3.0% according to BOK, 3.1% according to the KDI).

Further buoying the trend is the strong performance in exports, which account for a large proportion of the domestic economy. The daily average of exports — which analysts say correlates with domestic stock activity — totaled US$2.24 billion in October, 4.8% higher than in October 2019. This was the first time since November 2018 that the average value of daily exports exceeded the same month from the previous year. The strong performance continued in November, with gains of 6.3% compared to the same month in 2019. This is especially noteworthy because exports increased in spite of the strength of the won (a declining won-to-dollar exchange rate). Strong performance in semiconductors, automobiles, rechargeable batteries, and the bioindustry was also a factor.

While some say the stock market accurately reflects improvements in the economy, others say it has become overheated and divorced from the real economy.

A reason for the latter assessment is the unprecedented abundance of market liquidity. Vast sums of market funds freed up by fiscal and monetary policies amid the COVID-19 response have boosted the stock market and assets in general. The benchmark interest rate, which stood at 1.75% in late 2018, has been lowered four times, currently at 0.5%. The broad money (M2) balance, the total volume of money in the market, passed 3 quadrillion won for the first time in April; by October it had exceeded 3.15 quadrillion won.

The increase has been steep, with a rise of 9.7% from the previous year. The money multiplier (the ratio of M2 to the monetary base) stood at an all-time low of 14.6 as of September — indicating that money in markets is not translating into consumption and real investment. This could lead to talk of a stock market bubble.

The gap between stock prices and the real economy could also be explained by the stock market’s position on the sunnier side of South Korea’s polarized economy. Companies listed on the stock market tend to be in better shape than those that are not. This is particularly true for securities (KOSPI), basically the Ivy League of the stock market. Companies listed on the KOSPI index (590 as of December) saw sales, operating profits, and net profits respectively go up 12%, 58%, and 81% in Q3 compared to Q2. In contrast, real gross domestic product (GDP), which reflects the overall economy, was up by just 2.1% from Q2.

Stocks are expected to continue rising in Q4. According to the financial analysis firm FnGuide, forecasts for consolidated operating profits in Q4 totaled 33.59 trillion won (US$30.33 billion) as of Nov. 27 for 167 KOSPI-listed companies for which three or more securities companies listed projections. The number was up by 60.1% from Q4 2019.

Another factor exacerbating the gap between the stock market and the real economy is the deepening polarization of the stock market itself. For Samsung Electronics and other companies listed among the KOSPI’s top 10 stocks (excluding preferred stocks), market caps totaled 899 trillion won (US$811.89 billion) as of Dec. 14, representing nearly half (48%) of the total market value. In early 2019, that percentage stood at around 36%.

Amid projections for a stronger economy in 2021, the abundance of market liquidity, ultra-low interest rates (which mean low interest rates for banks), and soaring real estate, the conditions are ripe for investors to flock to the stock market. The problem has to do with the scope and speed of the increase.

“We’ve never seen so many funds freed up in such a short time by advanced and emerging economies alike,” explained Kim Han-jin, a senior research analyst for KTB Investment & Securities.

“The disconnect between the real economy and the stock market should rightly be seen as a liquidity boost stemming from loose fiscal and monetary policies,” he suggested.

“Some predict that it will take around two to three years for economic conditions to return to pre-COVID levels. In South Korea, stock prices have already reached prior levels after just six months,” Kim said. “The rate of increase has been too fast.”

South Korea’s stock trends stand out when compared with other countries, a potential reflection of the relative success of its disease control measures, which could explain the speed of its comeback. However, uncertainties stemming from the pandemic and government response measures remain a key variable that could unsettle the market.

By Kim Young-bae, staff reporter

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