On January 6, 2021, the Korea Composite Stock Price Index (KOSPI) surpassed 3,000 for the first time since its start in 1980. At the same time, the rise in the national real estate price was steeper than ever. While the difficulties of unemployed people, small enterprises and business owners are growing, the Korean economy is undergoing a drastic change in its asset market.
Despite the COVID-19 economic crisis, the sharp growth of the Korean asset market is attracting individual investors who aim to gain high-risk returns. This article examines the rapid change in the Korean asset market and the resulting reactions of investors, suggesting how we may face an unprecedented economy.
Changes in the Asset Market and its Cause
Due to COVID-19, “decoupling”, a disconnect between the asset market and the real economy, has deepened. In other words, unlike the rapid growth of the asset market, the underlying economy is more than stagnant.
In March, 2020, the shock of COVID-19 hit global financial markets. Consequently, KOSPI decreased to 1,457.64, the lowest in 11 years, as shown in the graph by Korea Exchange. Since then, the “Donghak Ant Movement” has steadily grown. Having earned its name from the Donghak peasant uprising in 1894, the movement of individual investors aimed to profit off the stock market after its fall. Filling the vacancy of foreign investment, individual investors continued to expand. In less than a year, not only did the KOSPI recover, but it soared even higher to 3,200 on January 25, 2021.
Likewise, according to the Korea Real Estate Board's National Housing Price Trend Survey, the sale price of housing in the Seoul metropolitan area rose by 0.80% in January 2021. The rise was a continuation from the steady increase over the last three months of 2020: October (0.30%), November (0.49%) and December (0.66%). Despite the government’s numerous real estate measures against the rise of housing prices from 2019, their effect on the market is not clear.
Lee Jeong-hwan, a Professor in the Division of Economics and Finance at Hanyang University (HYU), explained, “there is a limit to stabilizing asset prices because government measures did not expand the supply of basic housing.” Kang Seok-hoon, a Professor in the Department of Economics at Sungshin Women’s University, also attributed the rise in housing price to the extended obstacles to sell houses, such as the simultaneous rise in the holding tax and transfer tax.
The main cause of decoupling is the increased liquidity. In addition, long-term low interest rates, increased government spending, and the central bank’s aggressive monetary easing to reduce the impact of COVID-19 on the economy contributed to escalating liquidity. Liquidity does not necessarily raise asset prices, but during the pandemic it has been a different story. Money is being released rapidly in an unprecedented short time, causing the value of money to decline. As a result, investment in the real economy such as consumption decreases, focusing investment onto the asset market.
The Motivation Behind Investors’ Response
In general, the motivation to invest is based on people's belief that stock prices will continue to rise and that economic conditions will improve. However, unemployment rates and the struggles of businesses became worse and stock prices plummeted in March, 2020, which led individuals to invest, thinking it was their last chance to grow their assets.
According to Professor Kang, it was also observed that as a side effect of soaring housing prices, high-risk high-return investment was surging as an attempt to afford expensive housing. Professor Lee also interpreted that due to the alternative effect, individual investors were flocking to the stock or coin market, which is relatively accessible, with no current wage increase; the negative economic circumstances lead individuals to speculative investment.
Among individual investors, the largest age groups that started investing in stocks were those in their 20s and 30s. According to the Korea Capital Market Institute (KCMI), new, young investors have drastically increased in the stock market. It was also noticed that interest in stock investment has increased among students at HYU.
Cho Yong-jae, a Sophomore majoring in English Language and Literature, invested all of his savings in stocks during the pandemic as he expected several large companies to recover their stock prices again. Kim Jae-won, a President of the HYU stock club “Stock Wars”, first started investing in April 2020 and felt the need to invest while reading books on the economy. He said, “In the past, students in Stock Wars weren’t actually investing. Recently, however, there have been quite a few cases where new students have actually invested, and there is also a stock section in Everytime, the HYU online community, so I could feel students’ increased interest in stock investment these days.”
Contrasting Views on the Current Asset Market
In a sense, the rise of the current asset market is providing opportunities for income growth and is developing the investor-oriented stock market. There are also views that it is a sign of overcoming a recession. On the other hand, some predict that this overcome could merely be superficial and part of the economic bubble, as the real economy is not recovering and the growth of the asset market is due to a boost in liquidity. Thus, investment through short-term gains and ignoring the risks could result in immense losses.
“We have to admit the achievement of the stock market, which was showing signs of plunging right after the pandemic, but if the stock price continues to soar without a real economic recovery in the future, it will be dangerous for both investors and the national economy,” mentioned Professor Sung Tae-yoon, from the Department of Economics at Yonsei University.
In that sense, Professor Lee pointed out two major risk factors of the current stock market: the potential decline and the high volatility. People who invested when liquidity increased may not be ready for the possibility that prices will fall if liquidity decreases. This also means that volatility is high. Even if there is a trend, the asset market could fluctuate rapidly, and investors would be less prepared. In fact, the KOSPI did decrease for four days after reaching 3,200 on January 26.
The Prospect of the Asset Market and How We Should Prepare
KCMI reported at the 2021 Capital Market Outlook and Major Issues Seminar that the demand for stock investment and preference for high-risk assets are likely to continue due to a fixed low interest rate. KCMI also predicted that such prospects will continue even after the pandemic as individual investment in the stock market has greatly expanded.
Just as COVID-19 brought changes in the asset market, it is likely that critical economic issues of 2021 will be the end of the pandemic and recovery of the real economy. Hoping that more economic activities could resume, Professor Lee explained that the asset market will stabilize to some extent in the long term, and positive news such as the end of the virus is likely to lead to a rise in asset price. However, without the support of the real economy, the volatility could be quite severe. Professor Kang also pointed out that the current stock price reflects a discrepancy between the expectations for the future and reality. He advised that it is important to put efforts into bridging the gap between the asset price and the real economy.
In order to respond and prepare wisely in the asset market, it is important to refrain from excessive loans and make safe investments by distributing risks. Risk assets will fall at some point, but it is dangerous to use strategies such as investing through debt to recover the principal. Despite beginners’ luck, inexperienced investors should calmly analyze the ever-changing market. Professor Lee advised referring to past data to decide how to respond, especially in these uncertain times. Although predicting changes in the asset market and having interest in the current economic situation is important, it is necessary to carefully prepare for reality rather than chasing dreams. It is hoped that the firm grip of COVID-19 on the economy loosens to enable it to surmount the difficulties and move on for a rebound.