[Outlook]Trust in Korean stocks

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[Outlook]Trust in Korean stocks

The Korean stock market has risen for 13 straight weeks, setting a new record. The long-term increase has two causes. First, the economic circumstances inside and outside the country are healthy.
Beginning in the 2000s, Korea’s economy has been transformed from a rapid growth model to an advanced economic model of low growth. This was an inevitable change when our economy became the world’s 12th largest.
As our growth rate has become normal, at the 4 percent level, the difference between when the economy was reviving and when it was sluggish has become not very big, a stable growth model.
For the last several years, our economy was not sluggish. It changed normally in accordance with structural changes, and this contributed to the stock market’s rise.
The world economy is also stable. Japan and the European Union grow at the 2 percent level yearly, and China and India have entered the world economy as strong contenders. The U.S. economy has been somewhat in trouble, but that is merely an adjustment of the growth rate that has lasted for more than five years. For the first time in 15 years, economies in most regions are booming. Another contributor to the hike is the growing demand in the stock market. When the economy grows rapidly, building factories and manufacturing products are the best ways to make profits.
Meanwhile, when the economy starts to grow at a slower speed, there is little difference between profits made by running companies and profits made in the financial market, so financial assets increase. Advanced countries have experienced this. In part, this phenomenon is the reason money is pouring into the Korean stock market.
Until recently, in Korea, the volume of financial assets was very low compared to advanced countries. That was because investment in capital and real estate was more common and popular. But now our economic structure has changed so investment in financial assets, such as stocks and bonds, will keep increasing and the size of the stock market will grow. That Korean companies have become healthier and more efficient is another reason for the increase in stock prices.
Before the financial crisis in the late 1990s, Korean companies’ annual profits were not more than 6 or 7 trillion won ($6 or 7 billion). Now, their annual profits reach 50 trillion won because profitability has increased thanks to restructuring in the past several years. When a stock market reflects a temporary boom or recession, the market is not healthy.
The stock market also reflects structural changes in the economy. When this happens, the market moves in a single direction over a long time. The stock prices have gone up for three years and still they are expected to rise for quite a long time.
When the overall structure in the market is changed, investors must change their attitudes, too. First, what’s most needed is to invest over a long-term period.
Since 2004, Korea’s stock market has changed into a market that can grow over the long term, like U.S. stock markets. That’s because Korea’s economy has advanced and profits have become stable. The foundation for long-term investment has been formed.
Second, investors must think about the business of the companies in which they invest, more than any other factor.
Korea’s market now reflects companies’ profits and business even more clearly than other markets in advanced countries.
We can see this if we compare the 2002 presidential election in the United States and the 2006 North Korea nuclear crisis.
In the United States, the stock market fluctuated over a month just because the people did not know who would become the next president. But when North Korea conducted its nuclear test, Korea’s market came back to normal in one day. Korean investors can now distinguish the factors that affect businesses and factors that do not.
We must realize that indirect investment through funds is mainstream.
The stock market has become too complex for individual investors to make their own decisions. Variables that affect prices have become diverse and their influence has become stronger.
Thus, the need for institutions that offer professional knowledge and skill has grown bigger. In the United States, funds became popular when the economy was similar to Korea’s current economy.
The stock market changes more rapidly than the economy. Our stock market is growing and advancing, just like our economy has been renewed through restructuring. So, people should not lose trust in Korea’s stock market.

*The writer is the head of the Hanwha securities research center. Translation by the JoongAng Daily staff.

by Lee Jong-woo

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