A backward bourse
Banks make money primarily from charging more for loans than they pay on deposits.
Many Koreans wonder why they hear little about people earning big money from stock investments. Even economic experts cannot give a clear answer. Some give a textbook-like explanation. The Korean economy has lost its dynamics. Corporate performance has sagged, bringing economic growth down to around 2-percent. Others say it is because Samsung Electronics is more or less the sole driver of the main bourse. Samsung companies make up 450 trillion won ($395 billion) of the market capitalization, or 30 percent of the total Korean Composite Stock Price Index (Kospi) value. Without Samsung Electronics, the Kospi would not move.
These interpretations, however, do not explain the fundamental reason. Individuals are drawn to the market whenever shares show any sign of an upward movement. They got their hopes up for the Kospi rallying towards a record high of 2,216 on April 25, 2011. But that is wishful thinking.
Unless the fundamentals are improved, the market has its limit. The stock underwent a rout after talk of a North Korean provocation and possible retaliatory action from the U.S. last week. Funds go through similar swings. Local institutions trade as fast as retail investors and focus on short-term profits. A market rally, therefore, can hardly be sustained.
Legendary investors Warren Buffet, Peter Lynch and Benjamin Graham made billions from stock investments because they focused on long-term value instead of market momentum. Graham famously said, “In the short term, the market is a voting machine, but in the long run it is a weighing machine.” They kept to their principle when investing in Korean stocks. They parked their money in stocks with sustainable value after thorough analysis.
Stocks with 10 percent or more foreign equity investment total 466 or just 20 percent of the 2,249 listed Korean companies. Foreign buying entirely revolves around 30 manufacturing bluechips like Samsung Electronics, SK Hynix, Hyundai Motor, Hyundai Mobis and Posco. Foreign ownership in these companies’ shares is 50 percent to 70 percent.
Foreigners have been collecting these shares since the Korean stock market was liberalized in 1998. The real jewels of the Korean stock market are in the hands of foreigners. Samsung Electronics’ predominance in the memory chip market has been cemented in the so-called super-cycle in semiconductors, where prices as well as demand point to upward momentum. It estimates an operating profit of 40 trillion won this year regardless of the Galaxy Note7 debacle late last year. Its stock has nearly doubled from a year ago to hover above 2.1 million won. Most of the circulating stocks, except treasury stocks, change hands among foreign investors.
The Korean stock market has become a playing field mostly for foreign investors. Financial institutions are still chained by layers of regulations, a legacy of the government’s industrialization policy of the 1960s. Banks and securities firms merely acted as the financing channels for the mid- and large-sized manufacturers.
The world has changed, but these financing practices remain unchanged. Outdated rules still dominate the financial industry. The government has its heavy hand in bank and corporate affairs. Former President Park Geun-hye was able to demand donations from chaebol owners and had her senior secretary for economic affairs meddle in appointments in commercial banks.
These practices have made the Korean financial industry a frog in a pond. Banks make money primarily from charging more for loans than they pay on deposits. They play the role of consumer lenders in the U.S. In the meantime, foreign institutional players got richer from their investments in our blue chips.
The fact that local investors cannot make money from their stock and fund investments underscores the fundamental weaknesses of our domestic financial industry. The new president must upgrade and advance the Korean financial industry. Only then can Koreans make money off their own stock market.
JoongAng Ilbo, April 17, Page 28
*The author is an editorial writer of the JoongAng Ilbo.