Stocks and the real economy diverge, central bank reports

Finance

Published: 31 May. 2021, 18:08 Updated: 31 May. 2021, 18:49

Stocks and the real economy diverge, central bank reports

From left, Korea Investment and Securities CEO Jung Il-mun, Korea Exchange CEO Sohn Byung-doo, Korea Financial Investment Association CEO Na Jae-chul and BooKook Securities CEO Park Hyeon-chul celebrate the Kospi closing above 3,000 for the first time at the Korea Exchange office in Yeouido, western Seoul, in January. [YONHAP]

A team from the Bank of Korea wrote in a research paper that the local stock market does not fully reflect the real economy.

The team, led by economist Kim Do-wan of the macroeconomic and fiscal research team at the central bank, said Monday that the heavy weighting of manufacturing companies in the Kospi is a major reason for the disconnect.

Manufacturing companies accounted for 68.6 percent of the Kospi’s capitalization on average between 2015 and 2020, while services were 27.3 percent of the market cap, data from the central bank report showed. The top-10 list is dominated by manufacturers Samsung Electronics, SK hynix and Hyundai Motor.

Despite the abundance of manufacturers in the local stock market, their contribution to the country's gross domestic product (GDP) was not as big, creating a disparity between the movement of stock prices and the real economy.

Over the last five years, services were 51.4 percent of the country's GDP on average while manufacturing was 36.3 percent, the report said.

"Retail for instance is a part of services with large output but relatively small market capitalization," Kim said.

Mobile carriers are also those with a relatively small market capitalization compared to their contribution to the GDP, the report said.

"Under crises like the coronavirus pandemic, which had a differing impact on manufacturing and services, stock indexes could become a weaker indicator of the country's overall economy," Kim said.

As Covid-19 had a more severe impact on services, especially businesses that require face-to-face transactions, the real economy recovered more slowly than stocks, which bounced back from the end of last year.

"Our research shows one of the reasons for a gap between the movement of stock prices and the real economy," Kim said. "The main driver of the disparity during the Covid-19 pandemic is still the accommodative macroeconomics policies at home and abroad."

Kim added that as the local stock market is led by export-dependent manufacturers, the stock market index could be vulnerable to changes in the global economy.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]