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TOKYO — If there’s an economic equivalent of the magazine cover curse, South Korea may have found it. How else can one read the odd timing of Seoul picking this month of all moments to lift a ban on short selling?
Really, good luck finding many serious investors who are bearish on Kospi Index stocks — or Asia’s fourth-biggest and recently rated world’s most innovative economy.
This isn’t hyperbole. Even after a 41% surge over the last 12 months, Kospi-listed companies are on average trading about 30 times forward earnings. That compares bullishly with 34% for Nikkei 225 Index stocks.
And when economists look at the relative performance of South Korea’s economy, they see little standing in the way of further gains.
To be sure, concerns about Kospi froth abound. Bank of Korea Governor Lee Ju-yeol is having to deflect questions about bubble troubles in Seoul.
Lee’s most expansive comments on a topic central bankers try to avoid came on January 15, just after the index topped 3,000 for the first time in its 38-year history.
“It’s difficult to call the recent Kospi surge a bubble, but the speed of a stock rally is faster than in the past when we look at stock price trends and indicators,” Lee told reporters.
Part of the concern: late last month, the retail-investor-heavy Kosdaq index topped 1,000 for the first time since the height of the late 1990s dot-com bubble.
Choi Kwangwook, chief investment officer at J&J Investments, speaks for many by observing that “this current euphoria reminds me of 1999.”
Back then, of course, the Kosdaq was on a tear despite the 1997-98 Asian financial crisis tearing at the region’s economic seams. Today, the crisis involves Covid-19 and the fallout from the first global recession in several decades.
The fact that stocks are on a tear from New York to Tokyo, despite the pandemic, has punters buzzing about Warren Buffett.
The reference is to the so-called “Buffett indicator,” which takes the aggregate market capitalization of all US publicly traded stocks and divides it by quarterly gross domestic product (GDP). Last week, it jumped to a record high of 195%.
There does indeed seem to be a gaping disconnect between the spread of Covid-19 and the emergence of new viral variants, and global stocks surging to record highs in many bourses.
Yet where South Korea is concerned, conditions are vastly different in at least four respects.
One is that South Korea is arguably having one of the best recoveries among Organization for Economic Cooperation and Development (OECD) members. Two, the Bank of Korea is not engaging in quantitative easing, making equity gains more credible.
Three, Korea’s startup scene is having a genuine moment, fruits of years of government efforts to create space for young innovators to disrupt the economy. Four, President Moon Jae-in appears to be putting some meat on the bones of pledges to create a more innovative growth model.
In normal times, the 1% contraction in Korean growth in 2020 would be a sell signal. In today’s fractured world, it’s a solid performance as Covid-19 lockdowns devastate global demand.
Korea’s stability also has broader significance. The globe knows few better economic indicators than Korea’s sizeable, open and tech-heavy economy. Time and time again, Seoul has reached inflection points sooner than its peers.
South Korea flashing something approaching green could be a source of global optimism for the second half of 2021. Its export engine is riding a rising wave of demand.
So are China, Taiwan and Vietnam. China grew 2.3%, Taiwan 1.9% and Vietnam 2.9% in 2020. Even so, Korea’s export mix often provides greater insights into what’s afoot.
Samsung Electronics tells the story. Korea Inc’s most dominant name saw operating profit surge 26% in the fourth quarter from a year ago amid solid demand for memory chips.
Analysts are eyeing even bigger Samsung gains, a microcosm of how global confidence is, at worst, stabilizing and, at best, seeing a resurgence.
New tests of Samsung’s revival will come as the tech colossus releases its latest Galaxy smartphone aimed at taking on Apple’s 5G iPhone.
Bottom line: investors worried about weak macroeconomic underpinnings — and suffering a so-called Wile E Coyote moment— may find much to like in Moon’s nation.
“Given Korean listed companies’ expected growth in profits and competitiveness in the manufacturing sector, the stock markets’ sound performance is expected to continue,” says strategist Kim Hak-kyun at Shinyoung Securities.
Part of JP Morgan analyst Joyce Chang’s prediction that the Kospi is headed for 3,200 rests on the side-effects from Seoul’s crackdown on property speculation. That’s increased the appeal of betting on stocks.
Add in the arrival of Covid-19 vaccines, the global popularity of K-pop and a thriving e-commerce market, and Korea has all the ingredients for more Kospi high tide records.
Lee’s BOK team, meantime, has more monetary ammunition than most peers. Over in Tokyo, Bank of Japan officials are mulling ways to push bond yields even further into negative territory.
In Seoul, the BOK still has 0.5 of a percentage point of conventional monetary ammunition with which to work before even embarking down the QE rabbit hole.
It’s complicated for Korea, of course. The economy is benefiting from the government’s success in containing the coronavirus. But the BOK’s risk-reward calculation is more perilous than, say, the BOJ’s and most central banks around the region.
Even though growth and wage gains in recent years underwhelmed, property prices went gangbusters. The average cost of a Seoul apartment jumped 58% on Moon’s watch since May 2017, according to civic group Citizens’ Coalition for Economic Justice.
That surge is 4.5 times the increase tallied for nine years under the two previous governments. This has driven household debt to record highs of over 100% of GDP, leaving BOK officials loath to add more air to the bubble.
These “rising concerns about financial stability risks” means the “hurdle to a rate cut is high,” says economist Krystal Tan at Australia & New Zealand Banking Group. As such, she expects much of the heavy lifting to come from the government.
The good news is that years-long efforts to divert oxygen away from the family-owned conglomerates, or chaebols, that dominate Korea Inc is gaining traction.
Case in point: the nation earned first place once again in the Bloomberg Innovation Index, among other such polls over the last 24 months. It bests Singapore, Switzerland, Germany and Sweden, which round out the No 2 to No 5 positions.
By metrics including the concentration of high-tech public companies, spending on research and development, and patents and manufacturing capability, Korea leads the globe in ways that dovetail with optimism about the Kospi and Kosdaq.
Korea’s growing importance as a leader in semiconductors, consumer electronics, digital devices, petrochemicals and popular culture exports is rapidly diversifying an economy historically driven by autos and ships.
That puts the onus on Moon’s team to make good on pledges to recalibrate growth engines. A key priority: diverting more economic oxygen away from chaebols so that startups can generate the “trickle-up growth” Moon previewed in 2017. So is making the so-called “Korea discount” a thing of the past.
Lifting the ban on short selling is a step in the right direction. As recently as January 28, the International Monetary Fund was urging Seoul to lift restrictions on a key hedging strategy that it banned early last year. The IMF argued that since financial conditions upended by Covid-19 had stabilized, it was time to back off.
Doing so, IMF representative Andreas Bauer says, “will improve the functioning of markets and also help ensure that investors are more sensitive to risks.” It also means CEOs can’t take rising stocks for granted and must raise their innovative games.
Retail investors, after all, are dominating trading during the pandemic, making up roughly 70% of all Korea’s trading value.
That’s a marked shift from about 48% in 2019, when retail punters lagged institutional investors in terms of share of the market. Many small investors had hoped regulators would maintain the ban, fearing short selling will now put the Kospi’s rally at risk.
Koreans are increasingly catching the stock bug overseas, too. In January, their buying of international equities hit a record high of $5 billion, with Korean traders piling into stocks from Tesla Inc to GameStop Corp.
That’s left Korean retail investors “highly exposed” to zigs and zags of the US market, which accounts for about 80% of their holdings, says Goldman Sachs senior Asia economist Goohoon Kwon.
“With their heavy buying during a global equity rally in late 2020,” Kwon says, “a 10% market correction for example could put one-third of their holdings in the red.”
The good news is that Moon has another 12-plus months in power to turn the Korea discount into a premium. And to accelerate efforts to shift export-reliant Korea to a more innovation and domestic services-driven growth model.
It’s helpful that new US President Joe Biden plans a less confrontational and mercantilist trade policy. The US-China trade war of the last four years devastated the supply chains on which Korea’s economy relies.
Biden’s arrival on the scene offers Moon a chance at a reboot. Priorities include adding more fuel to Korea’s startup boom, turbocharging policies to strengthen corporate governance and shareholder return practices and cutting bureaucracy that impedes competitiveness.
It’s eminently doable. For more than 20-plus years now, Korea has been confounding the naysayers. It was the first to recover from the 1997-98 Asian crisis.
In 2008 amid the “Lehman shock”, comparisons with financial crisis-hit Iceland were rampant – and yet Korea largely stood its ground. In 2013, Seoul avoided the “taper tantrum” in emerging markets with remarkable skill. Ditto for 2020 as Covid-19 ravaged global growth.
Indeed, beating the odds seems part of the DNA of present-day Korea. Stock punters surely understand that. It’s now up to Moon’s government to ensure its underlying financial reforms give the bulls reason to keep running Seoul’s way.