[Viewpoint]Stick to fundamentals

The price of a company’s stock is the most obvious and recognizable standard with which one can measure the performance of top business managers. From the perspective of a stockholder, the most desirable business manager is one who makes the company’s stock price rise in the market.
Since Korea introduced stock options in 1997, the concept that businesses evaluate the performance of managers with their companies’ stock price performance in the market is no longer new to us.
President-elect Lee Myung-bak, who was the chief executive officer of a big business conglomerate, is probably familiar with the practice of evaluating business achievements with stock prices.
That could be the reason why Lee visited a securities company in Yeouido on Dec. 14, during the height of the presidential election campaign. There, he said, “I am somebody who has managed a real economy, so I don’t like to make empty political rhetoric. I can assure you, however, it won’t be that difficult to attain a composite stock price index of 3,000 if a change of government takes place ... I expect the stock price index to go up to 5,000 if things go smoothly during the five years of my presidential term.”
It is easy to talk about raising the stock price index to 3,000. However, it will only be possible to raise Korea’s benchmark Kospi from 1,800 to 3,000 if the prices of 10 leading stocks in the market jump three to four times higher than their present market price. Moreover, the higher the stock prices go, the more difficult it will be to raise them even more. Even if the rate of increase is the same, it will be necessary to spend more money to raise the price of expensive stocks. It is much more difficult to raise the stock price index from 2,000 to 4,000 than from 1,000 to 2,000.
If Lee Myung-bak were the CEO of a big company, we could not blame him for painting a rosy picture of the future prospects of Korea’s stock market.
In 2000, Lee Ik-chi, a former chairman of Hyundai Securities Company, induced people to invest in securities when his company introduced the “Buy Korea Fund” by saying, “The composite stock price index will go up to 3,000 in three years, and 6,000 in six years.”
Not many people believed in his words. The stock price index plummeted to 504.6 that year.
It is very dangerous for the president-elect to make predictions about the future course of Korea’s stock market. That is particularly true because stock prices do not always accurately reflect the performance of the economy.
We can prove it by comparing the rates of stock price increases recorded during previous governments. Since 1980, the highest rate of increase was recorded under the Chun Doo Hwan administration. It was 425 percent. But during that same period, the prices of stocks in other countries rose a lot, too. If we compare Korea’s recent rate of stock price increases with those of the United States and Japan, we will find that Korea’s stock market achieved remarkable growth under the Roh Moo-hyun administration.
During the five years of the Roh government, Korea’s stock market grew 2.6 times and 3.4 times higher than Japan and the United States, respectively.
This is why, whenever an economic issue came up, President Roh said boastfully, “Look at the rising stock prices!”
However, the economic reality went in the exact opposite direction of the stock price increase. The last 10 years, including five years under the Kim Dae-jung administration, was a dark age for Korea as far as the rate of investment was concerned.
The rate of increase in investment, which rose to double digits in the 1980s and 1990s, did not exceed the 3 percent mark on average during Roh’s term.
His distribution-centered policy, which divided people between the haves and have-nots, and stoked anti-business sentiment among officials chilled businesses’ investment psychology.
Their lack of investment resulted in more than 1 million youths being unemployed. As long as businesses refrain from making investments, there is no way that jobs can be created. While we pay attention to the rising stocks of export businesses which enjoy brisk exports to China, we seem to have overlooked the fundamental problems of our economy. I wonder whether the miserable defeat of the Roh administration in the presidential election was payback for its hubris. The high stock prices lulled the administration into thinking that the economy is sound.
Nowadays, the voices pointing out the downside of stock options are loud, even in the United States. They say that business managers are eager to introduce popular business policies to boost the price of stock, instead of improving the physical constitution of their businesses because they are paying too much attention to stock options. They even dare to manipulate the books. Because of this, the view that a CEO should be evaluated on the basis of his ability to raise the growth potential of a business, instead of stock prices, is gradually gaining strength.
It is even more undesirable that the leader of a nation sticks to stock prices.
If the president induces businesses to resume investments, and the stock prices rise due to stronger economic fundamentals resulting from investments, it will give added grace to something that is already beautiful. However, the price of a stock does not always rise in proportion to the strength of the economic fundamentals, because there are many other variables that determine stock prices. Already, domestic investors can see that much.
What the people want is to revive the economy, not raise stock prices.

*The writer is deputy business news editor of the JoongAng Ilbo.

by Jung Kyung-min