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The KOSPI made a new record by climbing up to 3,027.16 points during trading on Jan. 6 before closing at 2,968.21. (Yonhap News)

The KOSPI index broke the 3,000 mark for the first time in its history during trading on Jan. 6.

The index closed the day at 2,968.21, down 22.36 points (0.75%) from the day before. But during trading, it hit a record high above 3,000 points. Starting the day up 2.77 points (0.09%) to 2,993.34, the index surpassed 3,000 less than a minute later, going as high as 3,027.16.

The new record comes after the index first crossed the 2,000 mark in July 2007. On July 24, 2007, the KOSPI reached 2,005.02 during trading before closing below 2,000. The following day closed above 2,000 points for the first time at 2,004.22. This was around 18 years and four months after the KOSPI broke 1,000 on Mar. 31, 1989 (1,003.31 points).

Since crossing the 2,000 line, the KOSPI has experienced a long period of fluctuating fortunes. In October 2008, it tumbled as low as 938.75 (on Oct. 24) amid the global financial crisis. Even after it passed 2,000 again in December 2010, it continued to hover for over five years in the 1,800-2,020 range, leading some observers to jokingly refer to it as the “BOX-PI” or the “cage farm.”

In 2017, the index passed the 2,500 mark, registering 2,501.93 points on Oct. 30 on the strength of a global semiconductor boom. But after that, it stagnated amid the protectionist policies of US President Donald Trump and the US-China trade war. Every year without fail between 2010 and 2020, the index dipped below 2,000 at some point before bouncing back. Just last year, it slid all the way to 1,457.64 on Mar. 19 amid the COVID-19 pandemic.

The KOSPI’s sudden climb can be explained by a swarm of domestic individual investors. Based on the lessons learned from stock prices rebounding from the 1997 Asian financial crisis and the global crisis of 2007-2008, these individual investors have read the COVID-19 crisis as an opportunity and dove en masse into the market, propelling the KOSPI’s sharp rise. While foreign and institutional investors were selling off 24.5 trillion (US$22.53 billion) and 25.5 trillion won (US$23.45 billion) in shares on the KOSPI last year, individual investors bought 47.4 trillion won (US$43.58 billion).

As of Jan. 6, individual investors have purchased a net 4 trillion won (US$3.68 billion) in 2021, making them the key drivers of the “3,000 era.” After totaling 1 trillion won (US$919.46 million) when markets opened on Jan. 4 and 700 billion won (US$643.7 million) on Jan. 5, net purchases exceeded 2 trillion (US$1.89 billion) on Jan. 6.

Analysts are predicting a general rise in stock prices. Major securities firms have projected the KOSPI will mostly stay above 3,000 points this year. On Jan. 4, Samsung Securities projected a range of 2,700-3,300, far higher than the 2,100-2,850 range it had predicted two months earlier. Korea Investment & Securities and Shinhan Investment respectively raised their projections to 2,620-3,100 and 2,500-3,300, opening up the potential for additional gains.

Such optimistic predictions for stocks are based on the market’s current abundance of liquidity, along with forecasts that economies worldwide will improve greatly this year compared to COVID-ravaged 2020. Analysts also expect a recovery in the global manufacturing sector, which would translate into a boom for South Korean exports.

Analysts also noted the more diverse set of forces driving the stock gains, including strong performance in new growth industries and in the twin pillars of South Korean industry, semiconductors and automobiles.

“In the past, banking and steel were in the top tier in terms of market capitalization, but recently it’s been rechargeable batteries, IT, pharmaceuticals, and automobiles at the top, which South Korea’s market is keeping pace with global trends,” said Lee Gyeong-min, director of investment strategy at Daishin Securities.

Liquidity is another key factor beyond economic trends and industry structure. Market liquidity has increased greatly amid policy efforts to combat the pandemic, and a shortage of suitable fund managers amid ultra-low interest rates has also driven the stock rally. But a shift in fiscal and monetary policy toward decreasing liquidity could drive stocks back down.

As of late 2020, the market cap for KOSPI-listed companies was calculated to be 104% of GDP, passing 100% for the first time. Consequently, some analysts are calling the stock rally “overheated.” Bolstering this view is the recent rise in the ratio of KOSPI stocks to earnings (forward 12-month PE ratio), which has climbed to a historic high of 13.

Kim Young-ik, a Sogang University professor and former analyst, said the rise in stock prices has been “excessive relative to real economic indicators such as average daily exports.”

“The dog [stock market] has gotten too far ahead of its master [the real economy]. I think we’ve entered bubble territory,” Kim suggested.

High corporate and household debt-to-equity ratios are also being cited as constraints on the gains of individual investors. As of Jan. 15, the balance of credit financing — funds borrowed from security companies for stock investments — stood at 19.6 trillion won (US$18.04 billion), compared to the 18.6 trillion won (US$17.13 billion) in late October 2019, just before the stock rally took off. This could bode ill for the market if interest rates start to climb. Depending on how the pandemic plays out, the real economy could also fall short of expectations — not to mention political instability and other lurking variables worldwide. Even if the market continues its rally, the path could be a bumpy one.

On a related note, the KOSPI closed at over 3,000 on Jan. 7 at 3,031.68 points, an increase of 2.14% from the previous day.

By Kim Young-bae, staff reporter

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