[Financial Planning for the 100-Year Life] The Opportunity to Increase Stock Proportion Is Coming Soon

Appropriate KOSPI Level Considering GDP Is 2,965
KOSPI Remains Undervalued Compared to the U.S.;
Likely to Be Less Sensitive to Negative Factors

Last week, the Bank of Korea announced the 2022 flow of funds. The flow of funds not only provides a comprehensive view of where money is generated and where it flows throughout the entire country, but also shows how each economic agent raises and manages funds.

Last year, the household sector (including nonprofit organizations serving households) had a fund surplus of 182.8 trillion won, an increase from 146.9 trillion won in 2021. This means that in 2022, the amount our households saved in financial institutions exceeded the amount they borrowed by about 183 trillion won.

In contrast, the fund shortage of non-financial corporations increased 2.7 times from 66.3 trillion won in 2021 to 175.8 trillion won in 2022. The increase in household savings more than compensated for the corporations' fund shortages.

Following household savings, the balance of household financial assets increased by 6.05 trillion won from the previous year to 4984.9 trillion won last year. Households manage their financial assets by dividing them into cash and deposits, stocks, bonds, insurance, and pensions.

Last year, the proportion of deposits in household financial assets rose significantly to 45.9% from 43.4% in 2021. This was due to a sharp rise in interest rates, with bank deposit rates exceeding 5% at one point.

Conversely, the stock proportion in household financial assets decreased from 23.0% in 2021 to 19.7% last year. This is likely due to the sharp drop in stock prices, with the KOSPI index falling from above 3300 in the first half of 2021 to below 2200 in September last year. The proportions of bonds and insurance and pensions remained largely unchanged at 2.5% and 31.0%, respectively.

What changes can be expected in the composition of household financial assets going forward? First, the proportion of deposits is expected to decrease. Bank deposit rates, which exceeded 5% in the second half of last year, have recently fallen to the mid-3% range.

This year, South Korea's economic growth rate is expected to be around 1%, and inflation is also expected to decline. Reflecting this in advance, the 10-year government bond yield, which was 4.6% last October, has recently dropped to 3.2%.

Considering the leading nature of market interest rates, the Bank of Korea may lower the base interest rate within this year. If that happens, bank deposit rates will fall further, and household funds will flow less into banks. As interest rates decline, bond prices will rise further. Some bank deposits may be replaced by bonds.

The stock proportion is also likely to increase. There is no such thing as an appropriate level of stock proportion. There are significant differences by country. For example, at the end of last year, U.S. households held 51.3% of their financial assets in stocks. In contrast, Japanese households' stock proportion was much lower at 15.0%. Even within a country, stock holding proportions vary by age and income level.

As undervalued stock prices return to their proper levels, the stock proportion in household assets is expected to rise. The KOSPI has risen over the long term at a rate exceeding nominal gross domestic product (GDP). Assuming nominal GDP grows by 3% this year (real GDP 1%, inflation 2%), the appropriate KOSPI level is about 2965. Comparing the KOSPI market capitalization to broad money (M2), the KOSPI is estimated to be undervalued by about 15%.

There will be growing pains during the stock price normalization process. The shock may come soon from the U.S. The rapid expansion and contraction of monetary supply by the U.S. Federal Reserve has caused bubbles to form and burst in all asset prices, including bonds, stocks, and housing. Some small and medium-sized banks have gone bankrupt. The next phase will likely be a consumption-driven recession, which accounts for 71% of U.S. GDP.

Although interest rates will fall, stock prices may decline as corporate earnings growth?a key factor influencing stock prices?drops significantly. In this case, only South Korean stock prices will not rise. However, since our stock prices are in an undervalued range, the decline will be relatively smaller than in the U.S. An opportunity to increase the stock proportion is expected to come soon.

Kim Young-ik, Adjunct Professor, Graduate School of Economics, Sogang University

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