[Lee Jong-woo's Economic Reading] When Stock Prices Rise, It's High Tide; When They Fall, It's Low Tide... Are Donghak Ants Different?

30 Years of Three Active Personal Investments
Funds Quickly Withdrawn During Stock Price Drops
Attention on Whether Personal Investors, Who Say This Time Is Different, Will Stay in the Market
Customer Deposits Only 2.5% of Market Cap... Severely Decreased by 10 Trillion Won in a Month
Market Inflow Increased but Not Enough to Sustain Stock Price Rise

There is much talk about how individual investors have changed. Unlike in the past, when they temporarily entered the market as stock prices rose and exited when prices fell, they have now become a presence that firmly supports the market regardless of price. This change is explained by various factors. With easier access to information through home trading systems and social media, individual investors have reached a level similar to institutions and foreigners, their analytical abilities have improved significantly compared to the past, and low interest rates have increased the funds individuals can mobilize. Regardless of which factor triggered the expansion of individual investors, the outlook is consistently that individual investment enthusiasm will be sustained over a long period.

The United States is often cited as a comparative example by those discussing the positive changes in individual investors. A significant portion of household assets is invested in stocks, and stock prices have risen markedly. It is said that, following this recent rise, funds concentrated in real estate in Korea will move to the capital market. There are several points to consider when citing this outlook. One is past investment returns. Since 1990, the Nasdaq index has risen 30-fold over 22 years. The S&P 500 index also rose more than tenfold, though not as much as Nasdaq. During the same period, the KOSPI only increased from the 850s to 3000, a 2.5-fold rise. Over the past 30 years, the U.S. market recorded high investment returns, playing a major role in establishing stocks as an investment asset, but in Korea, stock returns were only about half those of bonds or deposits, so stocks failed to take root.

Because stock investment performance was poor and individual investors suffered significant losses, they always harbor the fear that stock prices could suddenly turn downward. The poor past returns are currently limiting investment. To overcome this anxiety and establish stocks as an investment asset, stock prices must first continue to rise, making it a place where investors can invest with confidence. This was the process the U.S. market went through. Americans overcame the psychological fear caused by the Great Depression and resumed stock investment only after the mid-1950s. During that time, although the U.S. economy repeatedly developed and secured a dominant position in the global economy, the stock market did not respond at all. Memories of the Great Depression influenced individual investor behavior for decades.

Over the past 30 years, there have been three occasions when Korean individual investors actively invested.

The first was from 1985 to 1988. The KOSPI rose from 150 to 1000, establishing the stock market in its current form. The number of real investors more than doubled each year, and those investors have formed the foundation of our market to this day. The second was immediately after the foreign exchange crisis, until 1999-2000. When stock prices rose from 280 to 1050 in eight months, an enormous amount of money poured into the market. While some individual investors invested directly, indirect investment through funds was more common, with nearly 1 trillion won flowing into equity funds daily. At that time, the market capitalization was 150 trillion won, so nearly 0.7% of the market capitalization flowed into investment trusts daily. The third was 2006-2007, when the economy improved due to the China boom and stock prices first exceeded 2000; nearly 80 trillion won flowed into equity funds over six months.

The problem occurred after the stock price rises ended. Although money poured in to the extent that it was said individual investors had changed during the stock price rises, except for 1989, in both cases money quickly exited with stock price declines, reducing the role of individual investors.

This time, it is uncertain whether individual investors will remain in the market. The outlook is not yet bright. The recent increase in individual investors is the result of low interest rates combined with expectations of rising stock prices. If either factor falters, the entire structure will be shaken. Since this is a result of liquidity operating without structural economic changes, like the mid-1980s’ three lows boom, it seems difficult to keep individual investors tied to the market for a long time.

It is also necessary to examine whether the money flowing into the stock market this time is enough to confirm a change in individual investors.

Last year, individual investors recorded net purchases of 64 trillion won in the KOSPI and KOSDAQ markets. During that time, customer deposits increased by 38 trillion won, and standby funds including Comprehensive Asset Management Accounts (CMA) increased by 51 trillion won. This trend continued this year, with individual investors recording net purchases of 30 trillion won in the two markets over the past two months. On January 12 and 26, they even achieved an unbelievable figure of over 4 trillion won in net purchases in a single day. The market influence of individual investors has reached its peak.

Despite this scale, the impact of the money individual investors put into the market varies depending on perspective. It is true that customer deposits have grown to an unprecedented scale compared to the past, but this only considers absolute size. As stock prices rose, market capitalization also increased, and considering this leads to a different conclusion. At the end of February, customer deposits and the combined market capitalization of KOSPI and KOSDAQ were 64 trillion won and 2519 trillion won, respectively. Customer deposits are about 2.5% of market capitalization, which is less than the 3% proportion during past stock price rises. Similar results appear when compared to trading volume. Over the past two months, the average daily trading volume of the KOSPI and KOSDAQ markets was 34 trillion won. This means that even with all customer deposits, trading could not be conducted for two days, whereas in January last year, when customer deposits were 20 trillion won, the figure was 1.5 days. In this situation, the seriousness is compounded by the fact that the deposit size decreased by nearly 10 trillion won from 74 trillion won to 64 trillion won over the past month.

The evidence that the money flowing into the stock market is large only holds when compared to economic indicators. A representative example is the comparison with monetary indicators. In December last year, the ratio of broad money supply (M2) to customer deposits reached the 2% range, the highest since statistics began in 2002. The difference between the two arises from the different response speeds of the market and the economy. Market-related figures like market capitalization change rapidly, so the proportion of individual investor funds compared to these does not increase, but economic variables move slowly, increasing the proportion of stock market funds. It is true that the scale of funds in the market is large, but it is not enough to continuously drive stock prices upward. While individual investors have played a significant role in the stock market over the past year, it is wrong to assume this will continue based on past immersion. Investment is reality.

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