[100-Year Life Finance] Entering Economic Expansion Phase and Stock Price Rise?

The economy goes through cycles of expansion and contraction. From the perspective of short-term business cycles, the Korean economy is entering the early stage of an expansion phase. Although the stock market rose last year in anticipation of this, there appears to be room for further gains.

According to Statistics Korea, our economy has experienced 11 cycles from March 1972 to May 2020. The average cycle length was 53 months. Among these, the expansion phase lasted an average of 33 months, while the contraction phase lasted 20 months.

Statistics Korea announces the months when economic peaks and troughs occurred, known as reference cycle dates. According to this, the most recent economic trough was in May 2020. Since then, Statistics Korea has not announced new reference cycle dates, but looking at the coincident index cyclical component, the most important economic indicator for determining these dates, it is estimated that the economic peak occurred in August 2022. Since then, the economy has been in a contraction phase. The coincident index cyclical component declined until December of last year.

However, the economy likely hit a trough in December last year or formed one in the first quarter of this year. This is because the leading index cyclical component, which typically leads the economic trough by 1 to 8 months, reached its trough in April 2023 and has been rising through December.

Signs of economic recovery centered on exports have appeared since the fourth quarter of last year. Exports, which had been declining from October 2022 to September 2023, turned to an upward trend (year-on-year basis) starting in October last year. In particular, semiconductor exports, which have the highest share in total exports, are showing signs of improvement. The share of semiconductors in our exports once rose to 20.9% in 2018 but dropped to 15.6% in 2023. This was due to the sluggish economies of China and Hong Kong, which account for more than half of semiconductor exports.

However, semiconductor exports have been on the rise since November last year. Although the increase in operating days contributed in January this year, semiconductor exports increased by 56.2% year-on-year. By country, exports to the United States have continued to grow strongly, while exports to China have turned upward for the first time in 20 months. Exports to ASEAN and India, which have high economic growth potential, are also increasing.

In the 11 previous economic cycles, the expansion phase lasted from as short as 17 months to as long as 54 months (average 33 months). Considering this, it is highly likely that our economy will be in an expansion phase during this year and next year. Of course, even if our economy enters an expansion phase this year, the economic growth rate will not significantly exceed 2%. This is because the potential growth rate of our economy has fallen to about 2%. Domestic demand, including consumption and investment, is expected to remain relatively weak, so the perceived economic improvement will not be substantial.

Since 1980, there have been 10 expansion phases. During these periods, the KOSPI rose by an average of 71.4%. By sector, the highest increases were in electrical and electronics (95.6%), steel and metals (82.8%), and chemicals (71.6%). During the fourth cycle expansion phase (September 1985 to January 1988), when the Korean economy enjoyed a boom due to the so-called ‘three lows’ (low oil prices, low interest rates, low dollar), the KOSPI surged by 356.1%. Excluding this period, the average KOSPI increase during expansion phases was 39.8%.

Last year, the KOSPI rose by 18.7%, and the KOSDAQ increased even more, by 27.6%. This reflected a preemptive response to economic expansion. However, both indices have declined this year. Nevertheless, the economy is entering an expansion phase. Although slow, this expansion is expected to continue through next year. Stock prices mostly rose during past expansion phases.

Currently, our stock prices are undervaluing this economic outlook. Over the past 24 years (2000?2024), our nominal GDP grew at an average annual rate of 5.7%, while the KOSPI rose by 7.4%. Considering this, the appropriate KOSPI level at the end of last year was about 3010. With economic expansion, the KOSPI is expected to gradually approach this level.

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

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