23.January.2021 – Korea
A variety of factors contributed to the rise of Korean stock market
Korean stock market has been on fire, more than any other stock market in the world. The KOSPI index has risen from 1,500 its low in March 2020 to 3,100 in January 2020. Why all of sudden Korean stock market has risen explosively, now?
- Weak dollar
I have written an article on the prospect of US dollar, mainly in the direction of depreciation. A weak dollar helps the emerging markets in the following ways:
- The value of foreign currency-denominated holdings rises as the dollar weakens.
- A weaker dollar allows emerging market countries more freedom to provide fiscal stimulus without fearing negative implications for their own economies. For instance, an emerging market government might feel more comfortable with fiscal easing if its currency is rising, dampening the potential for an inflationary shock.
- A weak dollar pushes up the price of commodity, upon which many emerging markets economy are dependent.
South Korea is classified as somewhat in between emerging and advanced markets, and it has also benefited from a weak dollar as foreign investors bought up stocks in Korea.
- Rise of individual investors
The Korean stock market has traditionally been largely influenced by institutional investors and foreigners, as individual investors preferred investing in real estate to stocks.
However, with recent skyrocketing housing price in South Korea, as I have written in previous article—and regulations that come with it—many have turned their attention to investment in stocks.
As a result, the number of stock account has risen by more than 10 million from 2017 (2.5 million) to 2020 (3.5 million), and retail investor’s trading ratio has risen from 65% in 2019 to 76% in 2020.
Many have even taken loans to invest in stocks, pushing up the stock market to record high.
- Relative outperformance of containing COVID-19
The number of COVID-19 infection in South Korea has recently risen sharply, around 1,000 per day in December 2020. The number has come down to 500 per day in January 2020, but whether the pandemic will be contained successfully remains unknown.
However, this figure is dwarfed by large number when compared against other advanced economies, such as Europe and the US, countries that have witnessed more than triple digit number of infections.
Therefore, South Korea, along with China that has also recovered from the pandemic by strong curbs and containment policy, is leading economic recovery. South Korea’s real gross domestic product (GDP), adjusted for inflation, is expected to grow 3.2 percent in 2021 after contraction in 2020, one of the highest in the world.
Such relative outperformance also bodes well for the stock market.
- Industry composition of the Korean stock market
Korea has been traditionally known for its heavy manufacturing industries back in the 2000s. While some of the heavy industries have not survived and disappeared, such as ship building company STX and shipping company Hanjin, many of Korean companies transformed well in the age of AI and new technology.
- Semi-conductor: Samsung and SK Hynix are undoubtedly leaders in semi-conductor industry.
- Electric vehicles: Hyundai Motors is also well positioned to reap the benefit of electric vehicle as it shifted its focus from carbon engine automobiles.
- Electric battery: LG Chemical and many other small medium sized companies have formed a strong supply value chain with electric vehicles.
- Entertainment and content: K-pop and dramas have captivated the world with the famous group BTS and movie, Parasite.
Therefore, the Korean stock market has benefited from successful transition of Korean companies and industries, and is well-positioned to navigate through the upcoming technological changes sweeping across the globe.
All of these factors have contributed to explosive rally in the Korean stock market. Whether such rally will be sustained is an open question, but the Korean stock market finally seems to have shrug-off its long-time “Korean discount”, the amount by which investors undervalue Korean stocks.
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