[GLOBAL EYE]A disconnected stock marketThe stock market is operating independently from the actual economy. The economy is in a slump, but the composite stock price index is soaring. The index went up by 100 points in July to hit 1,100, and some predict it will achieve a record high. President Roh Moo-hyun mentioned it when he proposed his “grand coalition” idea, saying, “Now that the stock price index has risen above 1,000 points and stabilized, I thought it might be the time to talk about the political structure.”
Generally, stock prices follow the economic growth rate. There have been three occasions when the index passed the 1,000 mark: in 1989, near the end of the boom caused by low interest rates, low oil prices and a weak dollar; in 1994, during the semiconductor boom, and during the IT boom of 1999 and 2000. At each of those times, the economic growth rate was around 9 percent, and so the stock market was seen as a mirror of the economy.
But the present situation is completely different. In this economic slump, with the growth rate having failed to reach its potential for three years in a row, the stock price index is the only thing skyrocketing.
This is not happening because the economy is improving. Rather, the recession is pulling prices up. It is a paradox that the rising stock market is not backed by the econonic fundamentals.
If the latest hike in stock prices is part of the re-evaluation of the Korean stock market, reflecting domestic and international expectations for the Korean economy in the second half of the year, we could not ask for more. Unfortunately, foreign investors are still cool on the domestic economy. They are reserved in their forecasts for growth, investment and consumer spending, and they still consider corporate management here to be a bigger obstacle to investment than the North Korean nuclear threat. So why does this groundless liquidity rally continue?
In short, the cause is the global money game, and abundant international liquidity. Since the IT bubble burst, a new industry has yet to take its place. So money without a destination is flowing into the stock market en masse, pulling up stock prices around the world. This is the reason for the strange phenomenon in which a pullback in investment actually boosts the stock market. Our market, in which foreigners have about a 40 percent share, is no exception to this money game.
Moreover, Korean companies, having lost interest in spending money on facilities, are using their surplus cash to buy their own stocks and keep the share prices up. As the number of investors in the stock market increases because of accumulation funds and other factors, institutional investors can afford to buy more, and as the stock market is infused with abundant cash, the market gains even more elasticity.
A stock market surge created by a liquidity rally during a recession requires special caution. First of all, the rally is not supported by the fundamentals, so the market’s rise will have a limit. As companies focus on the financial maneuver of repurchasing outstanding shares instead of investing in their facilities, they undermine growth potential, and in the long run, run the risk of making low growth virtually permanent.
Moreover, Korea is still an amateur in the global money game. Though the market is becoming more driven by institutional investors instead of individuals, they cannot afford to keep up with the tactics of foreign investors, who use advanced psychological strategies. When floating capital is poured into the stock market indiscriminately, it is less likely to become industrial capital than to be more prey in the money game.
Korean companies have become so sluggish about investing in facilities that the situation has been described as “a walkout of capital.” Some companies cannot afford to make investments because of government regulations, or fear of labor disputes. But there are many cases where the companies could not invest even if they wanted to, because they have failed to come up with an appropriate profit model.
As not just companies’ production bases but their consumer bases move abroad, there is no more urgent national task than rejuvenating the growth engine. Stock prices will always fluctuate, and when they go up even a little, individual investors will become cautious. A brisk stock market during an economic slump is welcome, but a chief executive could make no greater misjudgment than to look at a skyrocketing stock market and see an economy that is rolling along properly.
What everyone is concerned about is the possibility of a long-term recession arising from unstable policies. Instead of pressing the companies about why they are not investing, the government needs to resolve the uncertainty, instability and unreliability in its policies, which themselves are obstructing corporate investment.
This is a more urgent task than putting an end to regionalism in national politics. If the president feels confident about the economy because of the stock market, and so allows himself to become absorbed in political gamesmanship for the remainder of his term, there is no way he will be able to avoid being denounced as a president who has given up on the economy.
* The writer is a senior columnist at the JoongAng Ilbo.
by Byun Sang-keun