Warnings from the Kospi

The main Kospi breached the 3,000-mark for the first time on Wednesday. It went as high as 3,027.16 and ended at 2,968.21 on profit-taking. It has taken 13 years and five months for the Kospi to touch a new milestone after passing 2,000. The stock feat comes amid few economic upsides due to the yearlong pandemic. The Korean market has been fueled by chip, IT and bio stocks.

But the sizzling rally calls for discretion. The dry powder fueled by swelling liquidity from unprecedented fiscal spending and monetary easing has been concentrated on the stock market due to scarcity in other investment options. The Korean stock frenzy is primarily led by individual investors who have been borrowing money to invest in stocks. Retailers have been gobbling up whatever was dumped by foreign and institutional players. The Kospi has been on an upward spiral since hitting under 1,500 in March last year. But unlike the hot stock market, the economy has been doing poorly throughout the year. Shops in commercial districts and towns lie empty.

There is a limit to the bull run if the stock market is not backed by corporate and economic performance. The so-called Buffett indicator — or the ratio of stock market valuation to the gross domestic product to measure the overheated extent — has hit a record high 123.4 percent for the Kospi last year. A stock market is deemed undervalued when the indicator falls below 80 percent and overvalued when it goes above 100 percent. Experts warn the bubbles may burst when the ban on short sale is lifted in March. Short selling, which bets on a share price fall, could deal a blow to a market with weak fundamentals. With Korea’s total household debt at 1.941 trillion won ($1.79 trillion), a stock burn for individuals could translate into a financial crisis.

Deputy Prime Minister for Economic Affairs Hong Nam-ki raised concerns about the disparities in the real economy and financial market and called for rigorous risk management to ensure stability in the financial sector. Bank of Korea Gov. Lee Ju-yeol echoed the worries, warning that the market can rock even at a small shock. Authorities must check the liquidity flow so that it does not over-concentrate in the stock market. Individuals must keep in mind that stock investment falls on their own judgment and responsibility.