[Encounter] COVID-19-Induced Low Growth Entrenchment, Indirect Investments Raise Retirement Concerns

[Asia Economy Reporter Park Byung-hee] "The COVID-19 pandemic is the 2020 version of the Black Swan. If the 2008 financial crisis was a Great Recession, then the 2020 COVID-19 crisis is a Great Shock."

Seon Dae-in, head of the Seon Dae-in Economic Research Institute, diagnoses the COVID-19 crisis in this simple yet chilling way in his new book Reshaping Wealth. He warns that the shock from the COVID-19 crisis will last a long time. This is because, as with the 2008 financial crisis, we actually do not fully understand the COVID-19 situation but mistakenly believe we do, leading to complacency in preparation.

The COVID-19 crisis differs from previous crises we experienced, such as the 1970s first and second oil shocks, the 1998 East Asian financial crisis, and the 2008 financial crisis. Earlier crises were caused by internal economic variables. However, the COVID-19 crisis arose from external economic variables, striking both the real economy and financial markets consecutively.

Due to COVID-19, global movement, distribution, logistics, and consumption sharply declined. Contrary to expectations, the shock to the real economy occurred very rapidly and on a large scale. As a result, anxiety and uncertainty intensified, and in March, the global stock markets plunged into uncontrollable chaos similar to the 2008 financial crisis.

In the first chapter of his book, Seon lists six structural trends that will most significantly impact the Korean economy going forward. The Great Shock caused by COVID-19 is the first. The other five are ▲the Great Clash representing the confrontation between the US and China ▲the power of money and bubbles that led to the longest economic expansion in history ▲the Fourth Industrial Revolution and digital transformation ▲population decline that entrenches low growth ▲China’s threat and North Korea’s opportunity.

The COVID-19 Great Shock is a new variable, while the other five are previously identified variables. The problem is that the COVID-19 Great Shock also affects existing variables, potentially creating new ones.

For example, the COVID-19 crisis will inevitably accelerate digital transformation. Companies will invest more aggressively in automation and the establishment of smart factory systems to prevent face-to-face contact from becoming a variable that causes production disruptions.

Job losses due to machines will accelerate further. Countries are likely to focus on expanding their domestic manufacturing bases. In the US, the inability to produce masks and swabs during this crisis caused significant difficulties. Therefore, reshoring (the return of overseas enterprises or manufacturing plants to their home country) is likely to accelerate in the future.

COVID-19 has also reversed the monetary policy direction of the US central bank, the Federal Reserve (Fed). Since the 2008 financial crisis, the Fed conducted three rounds of quantitative easing, releasing $4.8 trillion. The Fed, which had begun withdrawing these dollars, started injecting dollars again due to COVID-19.

This move by the Fed affects global asset markets. The Institute for Policy Studies (IPS) reported that the wealth of billionaires in the US increased by 10% within three weeks after the COVID-19 outbreak. The wealthy increased investments as asset prices plunged due to COVID-19, and the investment market rebounded sharply, generating large profits. Changes in the Fed’s monetary policy will undoubtedly also act as a variable in the US-China trade conflict.

Seon advises that in the midst of these massive changes, those who want to increase their wealth should invest in stocks. He warns that real estate investment is not the answer. Those who think real estate investment is the solution after seeing Seoul housing prices rise in recent years are likely to face disappointment.

Contrary to common belief, stock price increases have outpaced housing price increases in almost all periods. Moreover, with the decline in the working-age population, aging, and low birth rates, housing demand will decrease while supply will inevitably increase.

Seon advises that if the low-growth phase continues, indirect investment products such as insurance or funds will not be sufficient for retirement preparation. He recommends gradually and steadily studying and increasing the proportion of direct investment first.

(Reshaping Wealth / written by Seon Dae-in / Tornado / 18,000 KRW)

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