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A sharp stock rally cannot last without innovation

Published: 27 Oct. 2025, 00:04

Shin Seong‑ho

The author is a former CEO of IBK Investment & Securities and a member of the Reset Korea Economic Committee.

Korea’s stock market has recorded the highest gains in the world this year. Along the way, many share prices have climbed to levels considered expensive by international standards. By price-to-earnings ratio, leading Korean shipbuilding stocks now trade higher than America’s seven major technology companies. Defense stocks have also surpassed their U.S. counterparts. When valuations stretch this far, volatility inevitably follows.

While the economy is expected to improve slightly next year compared to this year, most domestic research institutes forecast growth of only 1.6 to 1.9 percent. Since 1990, whenever the growth rate fell below 2 percent, stock markets have generally struggled to gain momentum. Abundant liquidity may temporarily support prices, but when valuations are already high and the recovery remains weak, markets become unstable.

A screen in Hana Bank's trading room in central Seoul shows the Kospi and the won-dollar exchange rate on Oct. 24. [YONHAP]

Recent trends in the exchange rate and capital flows suggest a dim outlook. The decline of the won cannot be explained solely by trade friction with the United States. Since the fourth quarter of 2022, when the won depreciated, it did so more sharply than most currencies, and when it strengthened, the gains were smaller. This pattern points to a structural weakening of the Korean economy, reflected in the sustained fall of the won’s value.

At the end of September, when the U.S. dollar index stood at 97.45, the won traded at 1,404 to the dollar in offshore markets. Yet at similar index levels, it was 1,168 won in January 2020 and 1,205 won in March 2022. Since April 2021, the won’s performance has lagged behind the Brazilian real, the Philippine peso, the Japanese yen and, since November 2024, even the Russian ruble. In short, the currency’s value has been in steady decline.

Capital has also been flowing outward for years. Between 2012 and August 2025, Koreans invested $791.7 billion in foreign securities, including $492.9 billion in overseas stocks. In comparison, foreign investment in Korean securities totaled $290.6 billion, of which only $16.9 billion went into Korean stocks. Even from May to August this year, when foreign investors bought a relatively large $8.7 billion in domestic shares, Koreans purchased $24.9 billion in overseas equities. The imbalance — large outflows of local funds and modest inflows of foreign capital — reveals the underlying reality of the Korean economy.

The prolonged depreciation of the won and steady capital flight stem from long-standing structural weaknesses. Policy authorities have neglected essential reforms such as industrial restructuring, the development of advanced new industries and labor market reform. When growth falters, officials resort to low interest rates and treat currency depreciation as natural. Politicians have relied on fiscal giveaways for short-term popularity.

Debt has ballooned while the economy has lost vitality. Korea’s benchmark interest rate is among the lowest in the world, apart from the European Union, Taiwan and Japan. Despite the sharp depreciation of the won, only a few countries — Japan, some in Europe and a handful facing severe economic distress — are expected to grow more slowly than Korea this year and next. That is cause for deep concern.

The impact on living costs has also been severe. As of August, import prices had risen 14.7 percent in dollar terms compared to 2020, but 35.2 percent in won terms — meaning households have borne much of the burden through higher prices. Korea’s trade surpluses in recent years were driven less by strong exports and more by weakened or reduced imports caused by the weak won. These macroeconomic strains have made corporate earnings volatile, and stock prices have mirrored those swings.

Korea’s exports in September rose 12.7 percent from a year earlier, driven by record-high semiconductor shipments that lifted overall export performance. In contrast, automobile exports to the United States fell 2.3 percent to $1.91 billion due to the 25 percent tariff imposed on Korean vehicles. The photo shows containers stacked at Pyeongtaek Port in Gyeonggi Province on Oct. 1. [YONHAP]

Despite the recent market rally, the fundamentals remain fragile. The economy still faces numerous potential shocks — from global debt overhangs in advanced economies like France's to looming tariff disputes with the United States. Except for the semiconductor sector, profit forecasts for listed Korean companies in 2026 have been revised downward.

Innovation and stronger corporate support are now essential. The economy might muddle through for a time on the strength of a few export industries, but without innovation, the long-term trend of slowing growth — declining by roughly one percentage point every five years for the past three decades — will persist. If left unaddressed, Korea could drift toward zero growth. The situation calls for urgent, decisive action.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.