[Financial Planning for the 100-Year Life] Stock Prices Expected to Rise with Increasing Market Liquidity

M2 Growth Rebounds After Hitting Bottom in August
Short-Term Idle Funds Also Rise to 1,450 Trillion Won

Liquidity has relatively contracted compared to the real economy. However, in terms of money supply and funds around the stock market, liquidity appears to be increasing partially.

The money supply is relatively decreasing compared to the real economy. Generally, the value obtained by dividing broad money (M2) by nominal Gross Domestic Product (GDP) is called the 'Marshall K.' During every economic crisis, the Marshall K has risen one step at a time. Especially in 2020, when the economy sharply contracted due to COVID-19, the Bank of Korea lowered the base interest rate to an all-time low (0.50%) and increased money supply.

Accordingly, the Marshall K, which was 1.50 at the end of 2019, reached an all-time high of 1.76 at the end of 2022. However, as this expansion of money supply led to inflation, the Bank of Korea raised interest rates and reduced money supply. As a result, the Marshall K decreased to 1.72 in the second quarter of this year.

However, market liquidity, especially liquidity around the securities market, shows signs of absolute increase. First, the growth rate of M2, a representative liquidity indicator, is rising. In December 2021, the M2 growth rate (year-on-year) was 13.2%, but it fell to 2.2% in June and August this year. However, in September, it slightly increased to 2.5%. Although more months of statistics need to be observed, it seems to be switching to an upward trend from the low point in August.

Second, over the past two years, money has flowed into fixed deposits with high interest rates. This can be measured by the ratio of narrow money (M1) to broad money (M2). M1 consists of cash currency, demand deposits, and savings deposits with immediate withdrawal. These funds can move immediately to other places depending on expected returns.

M2 is a monetary indicator that includes M1 plus fixed deposits, time deposits, and negotiable certificates of deposit, which have lower liquidity than M1. Along with the Bank of Korea's base rate hikes, bank deposit interest rates have also risen significantly. Last year, banks offered fixed deposits with about a 5% interest rate for one year. As a result, a large amount of money flowed into deposits, and M2 increased relatively more than M1. The ratio of M1 to M2 was 37.7% in October 2021 but decreased to 31.0% in June this year.

Looking at past statistics, when this ratio decreases, stock prices also fall. However, it has not decreased further since then. Market interest rates have been falling since November. Considering this, bank deposit interest rates are expected to decrease, and some deposits will seek new sources of returns.

Third, in a narrower sense, short-term idle funds are increasing. Short-term idle funds are highly liquid funds that can move anytime to places with higher expected returns. These include cash currency, demand deposits, savings deposits with immediate withdrawal, money market funds, negotiable certificates of deposit, repurchase agreements, and investor deposits. Short-term idle funds, which were 1,609 trillion won in December 2021, sharply dropped to 1,390 trillion won in January this year. However, they increased to 1,450 trillion won in September. Past statistics show that short-term idle funds increased when stock prices rose, and stock prices also rose when short-term idle funds increased. Although not yet sufficient, the increase in short-term idle funds raises expectations for stock price increases.

Fourth, money that can directly buy stocks is also gradually increasing. Investor deposits and equity-type beneficiary certificates decreased from 169 trillion won in January 2022 to 138 trillion won in January this year. However, this fund recently shows signs of increasing to around 150 trillion won.

The KOSPI is undervalued compared to M2. Over the past 10 years (2013?2022), the proportion of KOSPI market capitalization to M2 averaged 56.3%. In September this year, this ratio was 50.9%, and in October, it was 47.1%, estimated to be about 16% lower than the average. As stock prices find their proper place, there is a high possibility that stock prices will rise along with the increase in liquidity related to the securities market.

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