[Good Morning Stock Market] Individual Funds with 40 Trillion KRW Net Purchases Expected to Continue Inflow

Turning Attention from Low-Interest Bonds and Heavily Regulated Real Estate to the Stock Market
Trend of Increasing Focus on Earnings Stocks Expected

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] There is a growing expectation that funds from individual investors, whose net buying volume has already exceeded 40 trillion won, will continue to flow steadily into the stock market. This is because stocks are judged to be advantageous investments, given their expected higher returns compared to bonds and the historically low interest rates.

◆ Daejun Kim, Researcher at Korea Investment & Securities = The major players in this year's stock market are individual investors, commonly called 'Gaemi' (ants). As seen from the cumulative net buying volume, individuals have accumulated 32.2 trillion won worth of stocks in the KOSPI market and 7.9 trillion won in the KOSDAQ market. Thanks to this, trading volume once exceeded 30 trillion won. In a market abandoned by foreigners and institutions, individual investors are effectively driving stock prices.

This trend is likely to continue in the second half of the year. The reason is simple: stocks generate money. Especially, higher returns are expected compared to bonds. The investment attractiveness of stocks and bonds can be understood through the yield gap, which is the difference between the expected returns of the two assets, and recently the yield gap favors stocks. With the Bank of Korea's easing policy, interest rates have dropped to historically low levels, making stocks absolutely advantageous. Recently, bond and deposit interest rates are only around 1%. Investing in bonds offers limited upside potential, and even if one subscribes to fixed deposits and receives interest, the returns are not significant after taxes. Consequently, investors with surplus funds naturally look to stocks. The customer deposits, which can be seen as potential investment funds, are approaching 50 trillion won, which supports this.

More individual investment funds can flow into the stock market. Looking at the total money supply (M2), which exceeded 3,000 trillion won this year, the probability of this happening is very high. Money no longer goes into bonds or deposits. Real estate, which is increasingly regulated, is also not an option. The only alternative is stocks. However, a lot of money is not yet circulating in the market. The turnover rates of demand deposits and savings deposits included in M2 are lower than before. If dormant funds start circulating faster, some or a significant portion of them could flow into the stock market.

Currently, the ratio of stock market capitalization to M2 is slightly below the 20-year average. Considering the mean reversion characteristic, this ratio could rise from its current level. This means that as M2 increases, the stock market size can also grow. In the current liquidity-driven market, the likelihood of such a trend is even higher. If individual investors' outlook on stocks becomes positive, this ratio might even exceed the average.

◆ Kyungsoo Lee, Researcher at Hana Financial Investment = The profit rebound in the U.S., which suffered the greatest impact on earnings due to COVID-19, is remarkable. The change in the U.S. 12-month forward earnings per share (EPS) over one month is +2.1%, the highest worldwide. The automotive sector led this trend. Previous earnings estimates for companies like Tesla and GM were quite low, but they have recently been rising sharply. The stock prices of these companies are also performing well. Beyond automobiles, it is important to note that the earnings momentum factor (long-short basis) has recently started working very well in advanced markets including the U.S.

Originally, the earnings momentum factor in advanced markets did not record the highest performance as it does in emerging markets. The low-growth advanced markets are dominated by passive inflows, so factors related to earnings perform less well compared to factors like low volatility and dividends. In contrast, emerging markets, driven by high growth and active management, see the highest performance from earnings upgrade-related factors. Nevertheless, the recent strong performance of the earnings momentum factor in advanced markets indicates a polarization of earnings. Scarce earnings are attracting concentrated attention from abundant liquidity. This global trend of earnings premium will continue to be reflected.

This content was produced with the assistance of AI translation services.