[In-Depth Review] 2022, Another Wing Is Needed

Nam Dong-jun, CEO of Tekton Investment Advisory

Nam Dong-jun, CEO of Tekton Investment Advisory

Since the beginning of the year, while the U.S. stock market has risen by more than 30%, the Korean market has barely maintained a flat trend. As this relative underperformance has continued for nearly a year, domestic investors’ dissatisfaction has accumulated, and they are likely hoping for a quick recovery. What is the probability that this gap will return to its original position? Looking back at the past, we can find uncomfortable but objective facts.

Over the past 30 years, the KOSPI outperformed the U.S. S&P 500 index relatively only for about five years between 2002 and 2005. Without the truly exceptional help of the Chinese economy at that time, that record might not even have been seen. As a result, over the long-term 30-year returns, the U.S. market has shown performance at least three times better than the Korean market. Especially during periods when new industrial trends emerged, the gap widened significantly. These were times when new industries such as PCs, the internet, mobile, artificial intelligence (AI), and autonomous driving began and rapidly expanded?whether called a revolution or a new economy. There were many companies leading these new industries in the U.S., but not many in Korea. There is no other reason to find.

Domestic investors’ overseas investments are rapidly increasing. According to the Korea Capital Market Institute, as of the second quarter of this year, the balance of overseas stock investments by domestic investors was about $545.4 billion, an approximately 160-fold increase compared to 2003 when overseas investment began. The increase in scale is remarkable, but the change in investment participants is also interesting. Until before the 2008 global financial crisis, it was mainly financial institutions such as asset management companies that increased investments, but since then, the public sector (general government), including domestic pension funds, has led overseas stock investments. Recently, direct overseas stock investments by individual investors have been increasing the fastest. As of October, the balance of overseas stock investments held by domestic investors through the Korea Securities Depository was about $68 billion. This is more than five times the amount at the end of 2019, before the outbreak of COVID-19. Although it is difficult to interpret clearly, this may be a statistic revealing the trend of individual investors who have become wiser(?) than the public or pension funds.

Nevertheless, the proportion of overseas stock investments by domestic investors remains relatively low. From a global perspective, this is serious. Korea’s share of global GDP is around 2%, but domestic investors’ investment proportion in Korea is 80%. Of course, home bias is observed in most countries. However, compared to U.S. investors, who have a home bias exceeding 25% of global GDP and 40% of market capitalization, Korea’s home bias is absolutely excessive. This is clearly reflected in domestic individual investors’ purchases of Samsung Electronics from last year through this year. This does not mean that buying Samsung Electronics was wrong. From the perspective of diversification for risk adjustment, it can be said to be relatively excessive. There are many more alternatives if one looks globally.

There was a time when there was no need to have the wings of overseas investment for various reasons. However, the changes in today’s world demand that we change our way of survival. Warnings continue to be sent that if we do not change, we will be left behind. We call the period when the overall mode of survival in society inevitably changes the era of revolution. During such times, new industries emerge and experience exponential growth. From an investment perspective, it is also an era when unimaginable excess returns can be obtained. Next year, trying to seize such opportunities only within Korea does not seem like a good idea.

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